While credit conditions are still beguilingly sanguine, all is not quiet any more.
We had previously written about the consumer debt situation. Now, with the upheaval in the banking industry, it is wise to take a closer look. And a brief glance can point us in the direction of some themes which will likely become more important in the months to come. This excepts SVB, which was a unique bank with its own issues. The themes I’m covering are more general.
First off, there is an intuitive (and an empirical) relationship between bank failures and future economic growth. The logic is easy: sources of credit are sidelined, and overall skittishness increases. While every cycle is different, these days markets are most worried about smaller and more specialized banks rather than the big national banks and mortgage originators that were brought down in the GFC. Why is that, and more importantly, what does that mean for credit access?
Simply put, the loan books of small and regional (herein S&R—those with <$250BN in assets) banks tend to be distinctly different from the largest players in commercial banking.
According to current Federal Reserve data, ~18% of total debt is held by the S&R segment. Among those banks, the highest shares of loans are in are commercial real estate (CRE) (~39%), other loans (~30%), and consumer loans (~25%). They have relatively lower shares in commercial and industrial (C&I) loans (~11%) and mortgages (~15%). Drilling down further, the CRE books are higher for traditional CRE (~55%) and construction/development loans (~48%) vs. multifamily (~22%).
Source: Federal Reserve, Assets and Liabilities of Commercial Banks in the United States, H.8
In the consumer segment, S&R banks hold more in credit cards (~36%) than car loans (~15%). Within C&I, they are busiest in small business loans (~47%).
These are the areas where the effects of the upheaval are likely to be felt most severely. And that is on top of the tightening of standards already announced in the latest Fed Senior Loan Officer Opinion Survey (available here), where credit officers indicated further net tightening through 2023 in CRE (61%), smaller C&I loans (53%) and credit cards (40%). These are the types of loans and lending that most directly face small businesses. It is here where the pain may be felt most acutely.
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