Loan Me a Dime

Put on your wonky hats for this one. The second quarter Senior Loan Officer Opinion Survey (SLOOS) was released by the Federal Reserve last week. It addressed changes in the standards and terms on—and demand for—bank loans to businesses and households over the prior three months (generally corresponding to the first quarter of 2024). The top-line takeaway is that more than a year after the "mini" banking crisis—during which three of the four largest U.S. banks failed—there's been an easing in the percentage of banks tightening lending standards.

Survey respondents generally reported tighter standards and weaker demand for commercial and industrial (C&I) loans, as well as commercial real estate (CRE) loans to companies of all sizes. For loans to households, banks reported that lending standards tightened across some categories of residential real estate (RRE) loans, while remaining unchanged for others on balance. Not surprising was a weakening in demand for all RRE loan categories as well as for home equity lines of credit (HELOCs). Tighter standards and weaker demand were also evident for credit card, auto and other consumer loans.

What's notable about the recent period of tight lending standards was the absence of a recession. In addition, since late 2022, the tightening has been largely driven by Treasury yields and bank credit, rather than risk assets like credit spreads or equity market volatility (VIX). This adds color to why the Fed continues to view monetary policy as remaining fairly restrictive, even though market-based financial conditions measures, like the index shown below, suggest looser conditions.

Easing in financial conditions

Financial conditions, as measured by the Goldman Sachs U.S. Financial Conditions Index, have eased as bond yields have rolled over and stocks have recovered from the latest pullback.

Source: Charles Schwab, Bloomberg, as of 5/10/2024.

The GS (Goldman Sachs) U.S. Financial Conditions Index is defined as a weighted average of riskless interest rates, the exchange rate, equity valuations, and credit spreads, with weights that correspond to the direct impact of each variable on GDP.