Personal Wealth Management / Market Analysis

Transatlantic Bank Surveys Shed Light on Lending

Investors just got more color on how recent failures affected lending.

When assessing changes in economic data, we will often make the point that why is harder to know than what. You can easily see changes in an indicator, but identifying the cause is usually a matter of opinion. But every now and then we get at least some direct insight into the why, too. In banking, that took the form of Senior Loan Officer Opinion Surveys (SLOOS) on Monday, which report changes in credit standards and the reasons for those changes. These come out quarterly in the US and eurozone and add a nice dose of why to the prior quarter’s lending data. The ECB’s SLOOS for Q1 2023 came out last week and the Fed’s hit the wires Monday, adding some welcome color to lending data—and showing what is affecting banks’ decision making in the wake of Silicon Valley Bank, Signature Bank and Credit Suisse.[i] For investors, we think they are a helpful look at how banks are assessing risk, the headwinds they see—and how those might affect the economy over the foreseeable future.

We already know that lending has weakened a tad. In the eurozone, private sector lending fell on a month-over-month basis in January and February before stabilizing in March, with the negativity concentrated in business lending. (On a year-over-year basis, it rose 5.2% in March, slowing from 5.7% a month earlier.[ii]) In the US, where the Fed publishes weekly lending data, we know there were brief drops in mid to late-March, tied primarily to the accounting treatment of the twin bank failures, followed by a modest recovery as April progressed.[iii] But here, too, business lending was the sore spot. In both places, bank failures were an obvious scapegoat, and the SLOOS confirm they played a role. But they have other lessons to teach, too.

In the eurozone and US, weaker lending appears tied to both tighter supply and lower demand, but—interestingly—the bank failures didn’t lead to outsized supply changes. In the US, the net percentage of banks tightening standards for large businesses inched up from 44.8% in January’s survey to 46.0%, while a net 46.7% tightened standards for small business loans (up from 43.8% in January).[iv] Both increased at a much slower rate than in the past three quarters. In the eurozone, a net 19.5% of banks tightened business lending standards, which is actually down slightly from the net 26.5% in Q4 2022.[v] The trends were similar on the household mortgage front, with a net 11.0% of eurozone banks tightening (compared with 24.0% in Q4) and in the US, a smidge more banks tightening standards across all mortgage categories than in January.[vi] That doesn’t look like a bank panic freezing credit.

As for why the banks that tightened did so, eurozone banks cited higher funding costs and lower liquidity, tied mainly to the phase out of an old ECB program called Targeted Longer-Term Refinancing Operations, which funneled cheap funding to banks that promised to boost lending by a given amount. With this program winding down, banks now rely more on traditional funding avenues, where the ECB reports they face a “continued increase in bank deposit rate and shifts toward more highly remunerated types of saving.”[vii] Translated from banker to human, this means savings accounts rates are rising and consumers are flocking to the highest-interest options. This is all sort of good news? Yes, it points to some headwinds, and the erosion of banks’ low-cost funding bases is a risk we are keeping an eye on. But also, these are all sort of normal, boring reasons for credit to tighten as opposed to contagion from Credit Suisse and US regional banks. These headwinds are also quite well-known, which is crucial for markets.

In the US, unsurprisingly, bank failures played more of a role. The Fed didn’t outright ask about the effect of bank failures, but it isn’t hard to read between the lines. In addition to citing concerns about the economic outlook and their liquidity positions when explaining why they tightened, 59.6% cited higher funding costs and 42.9% blamed deposit outflows.[viii] Among midsized and smaller banks, half blamed deposit outflows and over two-thirds funding costs.[ix] When asked why they anticipate further tightening later this year, banks—particularly smaller banks—cited “increased concerns about the effects of future legislative changes, supervisory actions, or changes in accounting standards.” Seems to us all the jawboning from Congress, the Fed and the FDIC has banks spooked that major regulatory changes in response to problems at a handful of idiosyncratic regional banks could be coming.

This shows something important about how the financial system works. It is usually a foregone conclusion that new regulations can have a direct impact on banks’ willingness and ability to lend. But this is a stark reminder that the looming prospect of change, however remote, can discourage risk taking. It promotes a wait-and-see mentality, which is what some banks appear to be developing now. That can have real-world consequences by making credit less available, injecting less fuel into the economy. Yet, crucially, this also helps sap surprise power, enabling markets to gradually price in potential changes and their impact. SLOOS doesn’t come out in some parallel universe where investors don’t see it and don’t factor it into their decisions. Rather, this is among the most widely anticipated reports we have seen in quite a while, with a number of Where the Heck Is the SLOOS? articles hitting the wires before Fed head Jay Powell revealed its release date last week.

So yes, we agree the potential for regulatory changes or new accounting rules aimed at preventing regional bank failures risks introducing unintended consequences, complicating lending or exposing banks’ capital positions to more market volatility. We are watching that very, very closely. But many others are, too—chipping away at its power over markets. And that is before we even get to gridlock and political divisions over what to do.

In the meantime, though, it is encouraging that US credit standards didn’t tighten dramatically in Silicon Valley and Signature Banks’ immediate aftermaths. It suggests that banks didn’t overreact to what just happened, and it is more evidence that there was no national run on regional banks. If there had been, SLOOS would probably show an extreme increase in risk aversion and a lot more than half of smaller banks surveyed would be freaked about deposit flight. Instead, it showed banks are mostly just wary about politicians’ and regulators’ reaction. In our view, that is about as measured a response as you could get.

Overall, then, we think this report is a good snapshot of the wall of worry regional banks have helped build. It shows the expectations and concerns that markets have spent this spring baking in, and it sets the baseline reality will need to clear to deliver positive surprise over the next 3 – 30 months. That shouldn’t be difficult, given the overall skepticism woven in here.


[i] Not First Republic, though, since its FDIC seizure and shotgun wedding were a Q2 event.

[ii] “Monetary Developments in the Euro Area: March 2023,” ECB, 5/2/2023.

[iii] Source: St. Louis Federal Reserve, as of 5/8/2023.

[iv] Source: St. Louis Federal Reserve, as of 5/8/2023.

[v] Source: ECB, as of 5/8/2023.

[vi] Source: ECB and Federal Reserve, as of 5/8/2023.

[vii] Source: ECB, as of 5/8/2023.

[viii] Source: Federal Reserve, as of 5/8/2023.

[ix] Ibid.


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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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