2023-07-30 13:12:00
© Archyde.com. Wall Street is preparing for a major credit tightening
A major credit tightening is finally coming from both sides of the Atlantic, according to recent banker surveys.
following a new lift; Jerome Powell indicated that Monday’s poll of chief loan officers, which usually polls more than 80 banks, will show a tightening of lending standards. The extent of the decline in lending will be closely watched.
Less appetite for borrowing
Tight monetary policy and banking turmoil have caused problems for borrowers all over the world, from small to large corporations. in Europe; Business appetite for loans fell by the most in the second quarter, decelerating faster than expected.
Add in new US regulations that would force major banks to increase their reserve requirements by billions of dollars, and the long-awaited tightening of lending conditions is beginning to emerge, but its economic impact is less clear.
In light of the decline in demand for commercial and industrial loans; Banks such as Citigroup believe that the shift in the credit cycle might reduce inflation-adjusted GDP in the US and Europe by 1-2% by the end of next year.
US banks tightened lending restrictions in the first quarter
“It takes longer to have an impact on the broader economy, as the overall liquidity in the system remains strong,” Marvin Law, a global macroeconomic analyst at State Street, said of the rate hike.
For now, fixed income investors seem to be feeling comfortable. The extra yield that investment-grade companies are paying on their debt over government bonds is near its lowest level since just before the regional banking crisis, leaving money managers looking for safe havens.
Recession bets fail
The upbeat tone in the market reflects the fact that recession bets have not been successful all year, while alternative financiers, such as private credit companies, are ramping up lending.
“Continued monetary tightening is certainly a burden on lending, but an end in sight and increased confidence might help mitigate that burden,” said Stephen Kelly, a researcher in financial crisis management at Yale University. Doubts regarding a so-called soft landing are growing, but as the Fed continues to do what is considered unlikely on that front; The soft landing view will only grow in acceptance.”
Another concern for Wall Street is the new capital adequacy rules that will force major banks to increase their capital by 19%.
6 signs of a debt crisis in America
Kelly says the proposal, which will likely not be implemented for years, may already have an effect. He said before the official announcement last week: “The expected course of regulations regarding the capital of banks is also likely to affect their provision of any new loans.”
Clearly, any blow to the economy from tightening credit would be severe for many companies that accumulated debt mounds during the years of easy credit and now face rising borrowing costs. Bank of America chief financial officer Alastair Borthwick said in a conference call with analysts this month that issuers have responded by increasing payments on their commercial loans.
Increased defaults
In a note on Thursday, Armin Panossian and Daniel Polley of Oaktree Capital Management explained why higher interest rates are expected to increase defaults.
“Asset bubbles created during the era of easy money can burst, causing hardship, such as a series of downgrades, financial distress, and eventual default,” they wrote.
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