A lot of ink has been spilled about the “decline” and even “collapse” in bank lending in recent months. Let’s take a closer look and see if we can’t find some pragmatic conclusions here.¹

  • The Big Picture: Aggregate lending data tends to be noisy and it’s not at all uncommon to see sharp slowdowns in lending during expansions. That said, Total Lending is growing at 3.8% per year vs a ten year average of 4.4% so the current slowdown should not be exaggerated and in my opinion remains perfectly consistent with the slow rate of loan expansion during the recovery from the credit bust.

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    Whether this is the beginning of a trend of a normal late cycle slowdown remains to be seen, but let’s explore some of the possible explanations here:

  • The Trump Uncertainty Effect: As the Wall Street Journal recently noted, the election created significant tax uncertainty so a lot of lending decisions are on the backburner until further clarity is seen moving forward.
  • The Giveback Effect: A lot of what we’re seeing is a slowdown in year over year rates thanks in large part to strong years of lending in the past. In other words, the decline isn’t so much a “decline” as it’s just a higher hurdle for current trends to jump. But make no mistake, we are still jumping that higher hurdle even if it’s by a smaller margin than before.
  • As Goldman Sachs has noted, there’s significant downward pressure from the oil and materials sectors. This data, as Tim Duy has shown, is a lagging indicator and is more indicative of past sectoral weakness rather than future trends.
  • At the same time, there is clear evidence of a slowdown in demand and tightening lending standards in some segments such as Commercial Real Estate Loans. As the Q4 Senior Loan Survey highlights the demand is down across the board and the tightening is up across the board:
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