Recent data from the senior loan officer opinion survey (SLOOS) indicate a shift in the lending landscape of the U.S. banking system, with banks gradually relaxing their lending standards across loan categories. For example, the net percentage of domestic respondents reporting tightening lending standards for large and medium sized businesses declined from 51% to 8%. The survey also indicated a strong rebound in loan demand for commercial and industrial (C&I) loans for large and small businesses. As inflation expectations have normalized, the Federal Reserve is now poised to initiate a rate cutting cycle and U.S. banks seem to be more willing to extend credit to consumers and businesses. Monetary policy impacts the economy with long and variable lags (i.e. 12-18 months) but it is plausible that U.S. banks are anticipating and ultimately facilitating a credit cycle recovery as we move past the credit crunch of 2023.
Another improving credit indicator is the Bloomberg Credit Impulse Index, which measures the rate of change in new credit by the non-financial private sector (households, NGOs and non-financial firms) as a percentage of GDP. As we can see below, the recent pick-up in credit and bank loan creation is reflected in the recent rebound in the credit impulse indicator, which is a leading indicator for nominal GDP growth. While a brief and shallow recession remains possible, a rebound in the credit cycle is more supportive of a soft-landing scenario with an eventual recovery as credit growth normalizes. For U.S. consumers, the relaxation of lending standards can have significant implications. Easier access to credit means that more individuals can qualify for loans, whether for purchasing homes, autos and household goods. Lower borrowing costs and wider access to credit cards could also help boost consumer spending. Lastly, small businesses, the backbone of U.S. labor market demand, are also likely to benefit from the prospective easing of credit conditions.
In summary, the nascent relaxation of lending standards can provide a boost to both consumers and businesses as base interest rates normalize to more sustainable levels. The necessary caveat to this constructive macro scenario is that inflation expectations remain in check, and the Federal Reserve successfully follows through with its monetary accommodation cycle in a timely manner.
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This material represents an assessment of the market and economic environment at a specific point in time. It is not intended to be a forecast of future events or a guarantee of future results.
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