US Bank Lending Slumps By Most On Record In Final Weeks Of March And It’s Impact On Home Buyers

US bank lending contracted by the most on record in the last two weeks of March, indicating a tightening of credit conditions in the wake of several high-profile bank collapses that risks damaging the economy. US Bank Lending Slumps By Most On Record In Final Weeks Of March And It’s Impact On Home Buyers

* Loans By Commercial Banks Declined By Nearly $105 Billion

* Deposits At Us Banks Decreased For A 10Th-Straight Week

Two-Week Changes:

* Commercial And Industrial Lending — Considered A Closely Followed Gauge Of Economic Activity — Fell $68 Billion

* Commercial Real Estate Loans Dropped $35.3 Billion

* Total Assets, Which Includes Vault Cash, As Well As Balances Due From Depository Institutions And The Fed, Decreased Nearly $220 Billion

Commercial bank lending dropped nearly $105 billion in the two weeks ended March 29, the most in Federal Reserve data back to 1973. The more than $45 billion decrease in the latest week was primarily due to a a drop in loans by small banks.

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The pullback in total lending in the last half of March was broad and included fewer real estate loans, as well as commercial and industrial loans.

Friday’s report also showed commercial bank deposits dropped $64.7 billion in the latest week, marking the 10th-straight decrease that mainly reflected a decline at large firms.

The slide in lending follows the collapse of several firms including Silicon Valley Bank and Signature Bank.

Economists are closely monitoring the Fed’s so-called H.8 report, which provides an estimated weekly aggregate balance sheet for all commercial banks in the US, to gauge credit conditions.

The recent bank failures have complicated the central bank’s efforts to reduce inflation without sending the economy into a recession.

On Thursday, the American Bankers Association index of credit conditions fell to the lowest level since the onset of the pandemic, indicating bank economists see credit conditions weakening over the next six months. As a result, banks are likely to become more cautious about extending credit.

The banking crisis has made a recession more likely, according to JPMorgan Chase & Co.’s Jamie Dimon. The bank’s chief executive officer said in an annual letter that the failures have “provoked lots of jitters in the market and will clearly cause some tightening of financial conditions as banks and other lenders become more conservative.”

The Fed’s report showed that by bank size, lending decreased $23.5 billion at the 25 largest domestically chartered banks in the latest two weeks, and plunged $73.6 billion at smaller commercial banks over the same period. Lending by foreign institutions in the US fell $7.5 billion.

The biggest 25 domestic banks account for almost three-fifths of lending, although in some key areas — including commercial real estate — smaller banks are the most important providers of credit.

In a note on the report, the Fed said domestically chartered banks made divestments to nonbank institutions that affected $60 billion in loans in the week ended March 22, meaning those loans are no longer held by commercial lenders.

Meanwhile, so-called “other” deposits, which exclude large time deposits, have fallen $260.8 billion at commercial banks since the week ended March 15. At domestically chartered banks, they declined $236 billion, mostly reflecting a drop at the 25 largest institutions. Deposits at small banks fell $58.1 billion.

The Fed’s report on assets and liabilities of commercial banks includes breakdowns of credit by destination — such as consumer, real estate and commercial loans — as well as categories based on bank size.

The H.8 release is primarily based on data that are reported weekly by a sample domestically chartered banks and foreign-related institutions.

Updated: 3-24-2023

Companies Big And Small Lose Access To Credit Amid Bank Stress

Treasury market volatility keeps companies on sidelines during normally busy time for corporate debt financings.

The capital markets have been on ice since the collapse of Silicon Valley Bank two weeks ago.

No companies with investment-grade credit ratings sold new bonds over the six business days from March 10 through March 17, the first week in March without a new high-grade bond sale since 2013, according to PitchBook LCD.

The market for new junk-bond sales has largely stalled this month, and no companies have gone public on the New York Stock Exchange in more than two weeks.

March is typically busy for new corporate debt financings: Companies look to secure financing before the blackout period between the end of the first quarter and the kickoff of earnings season, when they typically refrain from bond sales.

Lately, a lack of investor confidence and wild swings in the Treasurys market have kept companies on the sidelines.

Those with the highest ratings have sold $59.9 billion in new bonds this month, compared with March’s five-year average of $179 billion.

The riskier corporations that borrow by issuing higher-yielding junk bonds and leveraged loans are finding it even harder to sell new debt. Companies have raised some $5 billion of junk bonds this month versus the five-year average of $24 billion.

Although the market for investment-grade offerings thawed in recent days with nearly a dozen deals from utilities, insurers and other companies, the lull in activity among the largest, safest corporate borrowers suggests there could be further pain ahead.

Companies from mom-and-pop operations to multinationals will find it harder to access credit in the wake of sudden stress in the global banking system, analysts say.

“Ultimately, financial conditions will tighten further, either via additional central-bank tightening as they try to tame inflation or via a deterioration in the current banking crisis,” said Seema Shah, chief global strategist at Principal Asset Management.

The March 10 collapse of Silicon Valley Bank upended capital markets, reducing the risk appetite of the asset managers and pension funds that lend to companies by buying their bonds.

Extreme stress in the Treasury market further complicated borrowing plans. Liquidity—the capacity to trade quickly at quoted prices—fell sharply, and government bond yields saw their biggest single-day moves in years.

Corporate bond borrowing rates are determined by adding a risk premium to the Treasury yield, or risk-free rate. If Treasury yields are moving much more than normal, a company that launches a bond sale in the morning expecting to pay one rate could find the market has changed rapidly by the time the deal is priced in the afternoon.

That uncertainty over interest costs, a major expense for some companies, can keep them out of the bond market when volatility is high.

The Federal Reserve is watching lending conditions closely and announced another quarter-percentage-point rate increase Wednesday to fight inflation. Fed Chair Jerome Powell said that if recent bank stress makes it harder to borrow, the economy will slow and the Fed may not have to tighten policy as much.

“It’s possible that [bank stress] will contribute to significant tightening in credit conditions over time, and in principle that means monetary policy will have less work to do,” Mr. Powell said in a news conference.

Already, the Fed’s rapid campaign of rate increases has made it much more expensive to borrow, and inflicted particular pain on companies that borrow by issuing leveraged loans, a type of syndicated loan with a floating interest rate used by companies with poor credit ratings.

John McClain, a fixed-income portfolio manager at Brandywine Global Investment Management, said the biggest risks lie in the leveraged-loan market.

Roughly $300 billion in loans are coming due over the next three years, according to PitchBook LCD, and refinancing will be difficult.

“It’s going to be a triple whammy for the leveraged-loan space. Companies’ interest costs go up, the economy is ticking down so their earnings are going down, and the main buyer in that space, CLOs, may or may not be around,” said Mr. McClain, referring to the collateralized loan obligations that are a major source of demand for risky company loans.

Small businesses that rely on bank loans for capital expenditures are also facing a new reality, analysts say. Easy lending standards since the Fed cut rates to near-zero at the start of the pandemic in 2020 helped fuel a boom in small-business activity that has largely continued, despite now higher interest rates.

As the regional banks that have come under pressure in recent weeks adjust lending standards, some of their small-business clients may find they are offered loans under stricter terms, in smaller amounts, or not at all.

Many regional banks have also faced significant deposit flights in recent days, meaning they have less capital available to lend in the first place.

Even though small-business owners are now paying more for short-term loans—about 8% interest on average, compared with 4% in 2020, according to National Federation of Independent Business survey data—they have generally accessed credit with ease.

In the February NFIB small-business economic trends survey, just 3% of small-business owners said their borrowing needs weren’t satisfied. That figure topped 11% in 2010 during the global financial crisis.

“From the small firms’ point of view, credit has been pretty friendly,” said Bill Dunkelberg, NFIB chief economist. “But they don’t like the increase in rates. And we haven’t had time yet for the regional banks and little community banks to adjust their policies.”

Analysts are rushing to quantify the potential impact on the U.S. economy.

In the base case for Goldman Sachs Group Inc., tighter lending standards will subtract one-quarter to one-half of a percentage point from U.S. GDP growth in 2023, equivalent to the impact of Fed rate increases of the same size, according to Jan Hatzius, the bank’s chief economist.

“The risks are tilted toward a larger effect and the uncertainty will likely linger for a while,” Mr. Hatzius wrote in a research note.

Bank of America Trims Banking, Lending Group Amid Industry Slump

* Less Than 200 People Were Offered Roles In Other Parts Of Firm
* Bank Says It’s Aligning The Team ‘To Areas Of Greatest Need’

Bank of America Corp. is trimming its wealth-management, banking and lending group as higher interest rates continue to crimp business on Wall Street, forcing banks to make broader cuts.

Fewer than 200 staffers were offered different roles in other parts of the company while a handful, including some loan officers, were let go, according to people with knowledge of the matter. Salaries are being kept the same for everyone affected, while bonuses will vary based on new roles.

“As our business and client needs grow and evolve, our focus continues to be on aligning our team to areas of greatest need,” a representative for Bank of America said in an emailed statement. “Based on current market conditions, we are realigning talent to support these areas.”

Higher rates have prompted a slowdown in hiring across various lending businesses. Rivals Wells Fargo & Co. and JPMorgan Chase & Co., which eliminated thousands of jobs in home-lending after the Federal Reserve raised interest rates, cooling what had been a red-hot housing market.

Bank of America has held back on massive job cuts seen elsewhere in the industry. Earlier this year, the Charlotte, North Carolina-based company started telling executives to pause hiring, except for the most vital positions, as it tries to keep a lid on costs and prepare for a possible economic downturn.

The redeployment in the lending business comes after a decision last year to pull back from hiring after fewer employees decided to leave of their own accord.

After the 2008 financial crisis, US banking giants largely concluded that mortgages were better in moderation. Bank of America spread out numerous legal settlements to resolve tens of billions of dollars in liabilities, largely stemming from the purchase of troubled subprime-mortgage lender Countrywide Financial Corp.

Banks have retreated from financing offices and other commercial real estate amid slumping demand and rising rates, following a surge in lending in the first half of 2022.

In the latter half of the year, the firms became more selective and stiffened borrowing terms while issuing fewer new commercial property loans, Bloomberg News reported at the time.

Updated: 3-27-2023

Banking Crisis Raises Concerns About Hidden Leverage In The System

* Loans Have Been Layered Up During Era Of Low Interest Rates
* Deeper Probes, Stress Tests Likely After Recent Bank Turmoil

As traders rush to identify where the next bout of volatility will come from, some watchdogs think the answer may be buried in the huge pile of hidden leverage that’s been quietly built over the past decade.

More than a dozen regulators, bankers, asset managers and former central bank officials interviewed by Bloomberg News say shadow debt and its links to lenders are becoming a major cause for concern as rising interest rates send tremors through financial markets.

Federal Deposit Insurance Corp. Chairman Martin Gruenberg and BlackRock Inc. Chairman Larry Fink have called for more scrutiny in recent public comments.

The concern is that private equity firms and others were allowed to load up on cheap loans as banking regulations tightened after the global financial crisis — without enough oversight into how the debt could be interconnected.

Though each loan may be small, they have often been layered up in such a way that investors and borrowers could suffer if banks or other credit providers suddenly pull back.

“A slight downturn and an increase in interest rates will make some corporates default,” said Ludovic Phalippou, a professor of financial economics at Oxford University. “This puts their private debt providers in trouble and then the bank that provides leverage to the fund in trouble.”

Questions about the potential threat gained urgency following the demise earlier this month of Silicon Valley Bank, a major provider of financing to venture capital and private equity funds.

Credit Suisse Group AG, which fell into difficulties a few days later, also provided various forms of credit lines to fund managers.

Although neither bank’s problems were caused by those debts, the worry is they could have triggered wider contagion if the lenders hadn’t been rescued.

The decision to guarantee SVB’s depositors raised concerns that something wider has been missed around the systemic risk posed by the lender, according to a former Bank of England official, who spoke on condition of anonymity because that person wasn’t authorized to speak publicly.

Unlike banks, private equity and credit funds are protected in crises by the fact that their investors commit capital for lengthy periods of time. But the ignorance around potential problems and frailties that shadow banking poses to the financial system worries watchdogs, another former Bank of England official said.

The recent turmoil will likely lead to deeper probes into shadow lending globally, which includes credit provided by private equity firms, insurers and retirement funds, according to a different official with knowledge of the matter.

That means identifying where the risk ended up after it moved off bank balance sheets following the financial crisis. Regulators also want to examine the credit risk to banks from the loans they made to buyout firms during the boom in alternative assets, the person said.

To help spot potential problems, the BOE plans to stress test nonbank lenders including private equity firms for the first time this year. Further details are expected to be announced in the coming days.

Fund managers are also concerned. A systemic credit event poses the biggest threat to global markets, and the most likely source of one is US shadow banking, according to a survey of investors published last week by Bank of America Corp.

The US government’s top financial regulators signaled in February that they would consider whether any nonbank firms merit tougher oversight as systemically important institutions.

The Financial Stability Oversight Council will put “nonbank financial intermediation” back on the table as a priority for 2023, according to a statement from the Treasury Department.

The Federal Reserve, the Federal Deposit Insurance Corp. and the Financial Stability Board declined to comment for this story.

European Central Bank Vice President Luis de Guindos warned in an interview with Business Post published on the ECB website Sunday that nonbanks “took a lot of risks” during the era of low interest rates and potential vulnerabilities “can come to the surface” as monetary policy changes.

Layers of Debt

Debt has always been an important part of the business model pursued by private equity firms, but in recent years the borrowing hasn’t just been limited to loading up new acquisitions with loans to try to boost performance.

Institutions at each level of the private markets food chain — from debt and private equity funds themselves to their management, the businesses they own and even investors into their funds — can now access a wide variety of leverage from banks and other debt specialists.

An increasingly popular area is net-asset-value lending, a type of borrowing where buyout firms raise money against a bundle of assets they own.

As sponsors struggle to sell businesses amid rising rates and challenging financing markets, they increasingly rely on such loans to shore up portfolio companies and keep distributing money back to their investors.

The loans are modest compared with the types of leverage in circulation before the global financial crisis, but similar types of investors provide the debt at each level, meaning a serious pull-back due to an unforeseen event could cause profound strain across the entire ecosystem, said some of the people.

One concern is that private equity leverage could trigger a tightening in credit conditions if the firms were caught up in a bout of volatility that made them unable or unwilling to lend or buy assets, one of the former Bank of England officials said.

Even before the recent turmoil, some finance providers were starting to rethink their exposure to the shadow banking sector.

Banks were less willing to extend fund-level leverage to direct lenders in January and there’s been a wider pullback by private lenders, some of whom have ceased making new leveraged buyout loans, Armen Panossian and Danielle Poli, managing directors at Oaktree Capital Management LP, wrote in a memo.

Competition among private lenders is starting to drop as companies face “declining revenues, shrinking margins, and high input costs,” Panossian and Poli said in the note published in January.

Hidden Risks

Banks also began trying to offload positions in leveraged funds from about September, according to one asset manager who has been approached by lenders, adding that it gave him some concern as it was the first time he had seen them try to do so.

The pullback hasn’t left funds short of financing options for now because debt funds, other banks and institutional investors have still been willing to allocate additional capital.

Regulators are still worried though that there are hidden risks in a sector that has been left to its own devices. Private credit will be an area of focus this year, one watchdog said, in part because it is predicted to double its assets under management to $2.7 trillion by 2026.

“Warning signs are developing in what is a completely unregulated segment of the financial markets with substantial amounts of hidden leverage and opaqueness,” asset manager VGI Partners Global Investments Ltd. said in a letter to investors at the end of January. “Private equity funds may prove to be a hidden risk in the system.”

Updated: 3-28-2023

What Happens In The Banking Sector Won’t Stay There

The fallout from Silicon Valley Bank and other institutions adds to the headwinds for economic growth.

The sudden loss of confidence by depositors in some US banks is causing many to focus on the scope for financial contagion and the needed policy responses.

What should not be overlooked is the other, and slower, contagion channel in play — that involving enablers of economic growth — which is less in focus but also important in determining how quickly the world’s largest economy will overcome this abrupt air pocket.

Banking is based fundamentally on trust. Any erosion in trust can, and does, lead to outcomes that were deemed highly unlikely or even unthinkable just a few days earlier.

This has played out recently with the sudden collapse of Silicon Valley Bank, the forced sale of Credit Suisse to UBS and the instability at First Republic Bank.

Reacting to the news, US depositors have reallocated part of their funds away from smaller banks and into the largest banks deemed too big to fail, money market funds and even crypto assets such as Bitcoin.

The magnitude of these deposit flows is far from insignificant, a development that will become even more apparent when the (lagged) data is released on Friday. So far, numbers from the Federal Reserve show that small banks lost $120 billion of their deposits in the week ended March 15, or a 2% decline from the previous week, on a seasonally adjusted basis. By contrast, deposits at large banks increased $67 billion.

The loss of deposits reflect a simultaneous convergence of four factors: long-standing structural weaknesses in the most fragile banks; Fed supervisory lapses; an interest-rate hiking cycle that started late and was far too slow, forcing one of the most concentrated set of rate increases in history; and the simple upside/downside calculus that, in the context of shaken confidence, favors deposit transfers even when the risk is objectively deemed low.

Some have seen the impact on financial intermediation as insignificant because much of the deposits have remained in the banking system. Yet even if that is the case, it fails to capture the offsetting items on banks’ balance sheets.

Specifically, the banks receiving the deposits are likely to have different propensities to lend, thereby influencing the scale and distribution of overall lending.

This could become a big issue for local communities, regions and sectors that fear that their access to loans will be curtailed because their traditional banking partners will have to shrink their balance sheets after losing deposits. It is also an issue for policymakers.

Working together, the Fed, Federal Deposit Insurance Corp. and Treasury can calm systemic deposit fears by liberally using refinancing windows and signaling a willingness to repeatedly trigger the systemic risk exemption to guarantee all deposits, as they did at SVB – that is, the use in exceptional cases of the lowest-cost intervention to counter serious economic spillovers and financial instability.

But that is unlikely to immediately and fully reverse the flow of fleeing deposits, thereby increasing the risk of a credit contraction that could undermine overall economic activity.

Unfortunately, there are no easy and immediate policy measures to offset this new headwind to economic growth, especially given the nature of the potential credit contractions and partisan realities in Washington.

Moreover, the reduction in lending was not supposed to happen so early, if at all, for small- and medium-size companies that have not overborrowed given the change in refinancing conditions (as is the case, for example, in the highly leveraged segments of commercial real estate).

This economic contagion, which will play out over time, threatens to increase the challenges facing an economy that is dealing with inflation, a mishandled interest-rate hiking cycle, declines in personal savings, bouts of financial instability and a slowing global economy.

It also complicates the longer-term adjustments needed for the green energy transition, the rewiring of supply chains, changing globalization, and the management of debt traps.

What is happening now is a reminder to financial companies, regulators and supervisors that the effects of banking accidents are unlikely to be contained to the banking sector. It is also a reminder to markets not to allow the understandable focus on supersonic-speed financial contagion divert all the attention away from slower-moving economic contagion.

Updated: 3-29-2023

How The Bank Mess Can Hit Home Buyers

Lenders probably aren’t going to be buying many mortgage bonds, which could put upward pressure on mortgage rates.

As investors scan for potential spillovers from the present banking crisis, one place to look is in mortgage rates.

There are several inputs into the rates that are offered to home buyers. One important one is how much mortgage-backed bonds are fetching in the market.

If mortgage bonds are in demand, that can lead investors to buy more mortgages at lower interest rates. But if mortgage bonds aren’t much in demand, that puts upward pressure on mortgage rates.

Right now mortgage bonds seem to be struggling. One way of measuring their relative demand is the gap, or spread, between the yield on a benchmark of 30-year mortgage bonds and the yield on 10-year Treasurys.

That spread has widened since earlier this year and hasn’t been immediately helped by the Federal Reserve’s move to slow its pace of rate increases last week.

It remains over two-thirds wider than historical norms, at about 1.6 percentage points at present versus less than 1 point on average over the past two decades, according to figures compiled by analysts at KBW.

The broader backdrop to this is that the Fed stopped buying mortgage bonds as it began to unwind quantitative easing. But banks could, in theory, be stepping up to be buyers in the Fed’s absence.

Yet instead, banks and mortgage bonds are in a complicated relationship right now. Mortgage bonds—in particular, packages of home loans guaranteed by the likes of Fannie Mae or Freddie Mac—are a big driver of the unrealized losses on bond portfolios that banks are struggling with.

One reason for that is that many homeowners are now effectively “locked-in” to the mortgages they got at rock-bottom rates back in 2020 or 2021, which will likely subdue home-buying activity, according to economists at Fannie Mae. By the same token, the lifespan—or duration, in financial lingo—of mortgage bonds gets longer as fewer people prepay by selling their homes or refinancing.

This means the bank owning a mortgage-backed bond is also locked-in for longer to whatever rate that bond was paying when they bought it—which might now be below the rate that depositors are demanding on their cash.

The good news is that banks aren’t likely to sell those bonds, as that would crystallize their mark-to-market losses, thus hitting their capital levels in many cases. Besides, those bonds may be stuck as collateral posted to the Federal Reserve or Federal Home Loan Banks to fund banks’ borrowing of backstop cash.

But the bad news is that banks also aren’t very likely to buy more mortgage bonds, even as they yield more and more, because of how much pressure lenders are under to stay as liquid as possible to meet withdrawals and, at some point, repay those backstop loans.

The absence of a huge buying force in the market could help keep the mortgage-bond-versus-Treasury gap bigger than it might otherwise be. “It is possible that spreads settle out at wider levels than we had previously expected,” analysts at KBW wrote recently.

Perhaps other investors might step up their bond buying, such as funds or insurance companies. An inflow of deposits coming out of banks and going elsewhere might help there, and perhaps put something of a lid on spreads.

Then again, it would create another issue if banks further scale back their home-lending businesses, because it could give nonbanks a bigger competitive opportunity to bolster their own pricing and push rates.

The bottom line is that home buyers hoping for a big break might not get one anytime soon.

Updated: 4-21-2023

A Corporate Credit Crunch Is Just Getting Started

There are worrisome signs of corporate distress in the wake of the banking crisis, raising the specter that a pullback in lending will drag down the economy.

A month after the collapse of Silicon Valley Bank, the US appears to have avoided the worst-case scenario — a rapidly escalating financial crisis — and markets have rebounded.

And yet, just below the surface, signs are mounting that credit is drying up in pockets of the economy at a worrisome rate.

Small businesses say it hasn’t been this difficult to borrow in a decade; the amount of corporate debt trading at distressed levels has surged about 300% over the past year, effectively locking a growing swath of businesses out of financial markets; bond and loan defaults have ticked up; and the Federal Reserve says banks have tightened lending standards. Corporate bankruptcies are on the rise, too, particularly in the construction and retail industries.

Some of this is, of course, by design — the result of Fed Chair Jerome Powell’s rapid shift away from the easy-money policies of the pandemic. And none of the signals is cause for alarm on its own.

But, taken together, they underscore the lingering concern that the Fed may have gone too far, too fast in pushing up interest rates to squelch inflation — and that by unleashing the forces that sunk SVB, policymakers could push banks to dial back lending so sharply the economy dives into a deep recession.

“We were already debating a hard landing before SVB happened,” said Torsten Slok, chief economist at Apollo Global Management. “If credit conditions continue to tighten because banks need time to be in a position where they can give loans and operate, that increases risk of a harder landing —even more so than what we thought before.”

Treasury Secretary Janet Yellen recently said that she hasn’t seen evidence yet that lending is contracting and that the possibility that it will hasn’t significantly altered her economic outlook.

That view was supported on April 14, when the Fed said bank lending rose for the first time in three weeks.

But other indicators show less reason for optimism. Take small businesses, which are facing more difficulty raising money since worries about regional banks flared up last month.

A net 9% of owners who borrow frequently said in March that financing was harder to get than it was three months earlier, the most since December 2012, according to a survey by the National Federation of Independent Business.

More Small Businesses Had Difficulty Getting Loans Last Month

Net share of business owners reporting that conditions tightened from three months earlier

John Toohig, managing director and head of whole loan trading at Raymond James Financial Inc., heard a similar story when he informally surveyed about 200 regional banks.

He found that about one-quarter toughened lending standards after the SVB collapse caused a swift pullback from some regional banks.

“Most of our customers are worried about funding and deposit pressure right now,” said Toohig. “They’re worried about liquidity.”

That could put more pressure on businesses already showing mounting signs of distress. Even before last month’s banking crisis, bankruptcies among private companies with at least $10 million in assets had jumped to an average of 7.8 each week by late February, a stark increase from the pandemic peak of 4.5 in June 2020, according to UBS Group AG.

“We’re already seeing substantial failure rates,” said Matthew Mish, head of credit strategy at UBS.

The bank said the bankruptcies have been concentrated heavily in the construction, health-care and retail industries. Among companies that have filed recently is bio365 LLC, an Ithaca, New York-based firm that makes specially engineered soil for crop growers.

Hit by rising inflation, it was forced to rely on expensive loans to stay afloat. It filed for bankruptcy this month, citing a “nearly debilitating liquidity crisis.”

Barclays Plc strategist Bradley Rogoff said the rise in such distress among smaller companies is an early warning sign of broader financial pressure. “The weakness we are seeing in smaller issuers is likely a harbinger of more stress to come,” he and his colleagues wrote.

Financial analysts anticipate that more companies will default on debt as lending standards are tightened and the Fed’s rate hikes keep rippling through the economy. The central bank is expected to raise rates again next month before likely taking an extended pause.

The volume of US corporate debt trading at distressed levels — a risk premium of at least 10 percentage points over the benchmark for bonds, or a price of less than 80 cents on the dollar for loans — has surged some 28% since last month’s banking crisis to around $300 billion, according to data compiled by Bloomberg.

That figure stood at up from about $74 billion a year ago.

“Yes, there is going to be a credit crunch, not a credit crisis,” Jim Caron, co-chief investment officer at Morgan Stanley Global Balanced Funds, said in an interview on Bloomberg Television. “But that credit crunch is going to take place over a long period of time.”

Companies in the leveraged loan market are particularly vulnerable to credit drying up because of their low ratings and reliance on floating-rate debt. About 25% of the $1.4 trillion market carries a B- credit rating, just on the cusp of the CCC grade that sharply curtails access to Wall Street borrowing, according to data compiled by PitchBook LCD.

Some big banks are bracing for more bad loans, according to earnings reports over the past week. Citigroup Inc. said it more than doubled what it has set aside to cover bad loans to $2 billion, the highest since 2020.

Morgan Stanley’s provisions for credit losses quadrupled to $234 million from a year earlier, primarily related to deterioration in the outlook for the economy and commercial real estate business.

That industry, which is heavily tied to regional lenders, has about $1.5 trillion of debt coming due by the end of 2025, Morgan Stanley strategists estimated in a note.

Building owners are being squeezed by higher interest rates and downward pressure on rents because of the shift toward working from home.

Paul Marshall, of Marshall Wace, one of the world’s biggest hedge-fund firms, warned investors this month that the dynamic is sowing the seeds of what’s likely to be a “fairly severe credit crunch” that is escalating the risk of a recession.

The concerns about such a crunch may also drive businesses to trim their reliance on credit, regardless of whether banks are willing to lend or not. That would threaten to add another drag on the economy as companies scale back investments.

“We are starting to see our customers be less aggressive in expansion and slow down going forward,” said Tom Terry, chief credit officer at UMB Bank, which is based in Kansas City. “Clearly, we have something ahead of us.”

Updated: 5-5-2023

US Bank Lending Rises For Fourth Week, Led By Small Institutions

* Loans By Small Banks Rose $30.6 Billion, Most Since December
* Deposits Edged Lower Due To Foreign Institutions In US

US bank lending increased for a fourth straight week, suggesting credit conditions remain relatively stable despite elevated concerns about regional lenders.

Commercial bank lending rose $41.6 billion in the week ended April 26 after increasing $12.4 billion the prior week, according to seasonally adjusted data from the Federal Reserve out Friday. The gain was fueled by the largest rise in loans from small banks since December.

Deposits edged down during the week to the lowest level since mid-2021, reflecting a drop at foreign institutions in the US. Deposits at small and large US banks increased.

Loans for residential and commercial real estate lending increased, along with consumer lending. Commercial and industrial loans were little changed.

To gauge credit conditions and concerns about contagion after several regional bank failures, economists are monitoring the Fed’s so-called H.8 report. The data provide an estimated weekly aggregate balance sheet for all commercial banks in the US.

Earlier this week, JPMorgan Chase & Co. agreed to acquire First Republic Bank in a government-led deal for the failed lender.

It was the second-biggest bank failure in US history. The collapse of First Republic followed failures of Silicon Valley Bank and Signature Bank in March.

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