Bank Stress and Lending Standards

The banking problems that dominated the news last month have largely faded into the background. Analysts are watching first-quarter earnings reports from the industry, looking for further signs of weakness, but the risk to the financial system seems to have eased.

That should mean that central banks can return their focus to the fight against inflation, which remains stubbornly high. Yet the Ides of March may still have an influence over monetary policy.

Banks are still under some measure of stress: indices of bank stock and bond prices are still depressed. Deposit movements have hindered liquidity at some firms. This combination of circumstances typically causes conservatism in lending.

The most comprehensive reports on bank credit conditions come from central banks. The Federal Reserve’s Senior Loan Officer Opinion Survey and the European Central Bank’s (ECB’s) Bank Lending Survey pose a series of questions that cover terms, pricing and demand across a range of loan types. The most recent editions of both reports came out in February, before Silicon Valley Bank (SVB) and Credit Suisse hit the headlines. Both indicated that conditions had already become quite restrictive, amid rising interest rates and recession probabilities. The next releases of the reports are in early May, coinciding with the next meetings of the Fed and the ECB.

Additional conservatism on the part of banks will slow economic activity. The degree to which this occurs depends on how reliant borrowers are on banks: European borrowers get about 60% their credit from this source. Encouragingly, the forced merger of Credit Suisse is generally being viewed as an isolated incident. The European Banking Authority recently released its latest risk dashboard, which showed strong capital and liquidity buffers.