(Reuters) – It’s an old saw: A credit crunch is when your bank won’t lend to you. A credit crisis is when banks won’t lend to each other.
Federal Reserve Chair Jerome Powell said Wednesday Silicon Valley Bank’s collapse and the banking system upheaval it triggered “are likely to result in tighter credit conditions for households and businesses, which would in turn affect economic outcomes.”
In other words: a credit crunch is coming.
Credit crunches are not new. They are frequent fellow travelers with recessions, but not always so. They also come with varying severity and durations, key factors Powell said remain unknown at the current time. Some small and concentrated crunches can weigh on growth without bringing the full economy to a standstill. Deeper lending clamp-downs can hobble the economy for years.
Here’s a look at some of the dynamics from past credit crunches in comparison with what has been observed to now in the current episode.
CRUNCH VS CRISIS
Total credit from commercial banks – consisting of their bond holdings and the full scope of loans to businesses and consumers, from routine business credit and commercial real estate loans to residential mortgages and credit cards – is just off its record high from mid-February.
But the credit growth rate has recently fallen below its historic average to a level that has often been associated with a recession. Overall annual credit growth rarely turns negative, but when it decelerates into the low single-digits as it has now, it shows that the lending that helps fuel overall economic growth is under strain.
Only once since the early 1970s has it actually turned negative, in the aftermath of the 2007-2009 financial crisis. That was indicative of the lasting restraint that episode had on the recovery in credit and economic growth overall.
(Graphic: Bank credit growth is slowing already – https://www.reuters.com/graphics/USA-ECONOMY/CREDIT/klvygqbgwvg/chart.png)
LESS RISK
When credit conditions tighten, among the first categories of borrowers to feel the pinch are those with lower means or with poorer credit profiles as banks pull back from risk. One place to watch for that dynamic is in the issuance of subprime auto loans.
New York Federal Reserve data shows those volumes hit the highest in nearly two decades in the middle of last year, but had slowed somewhat by year end, though on balance were at the upper end of volumes seen before the pandemic. In the last big credit clamp-down, those loan volumes fell by two-thirds between 2005 and 2009.
(Graphic: Taking less risk – https://www.reuters.com/graphics/USA-ECONOMY/CREDIT/byvrlmbokve/chart.png)
CONSUMERS VS BUSINESS
When overall credit conditions tighten, banks usually rein in loans to both consumers and businesses alike, though not always to the same degree and not always at the same moment.
And sometimes special factors will create a pinch for one but not the other. That was the case 8-10 years ago when low oil prices triggered a credit crunch among U.S. oil fracking companies, weighing heavily for a period on overall commercial loan growth while consumer loan growth kept improving.
Excluding the COVID-19 recession – when commercial loan volumes were distorted by pandemic relief efforts for businesses – business credit has suffered the bigger blow in the recessions so far this century. Consumer credit was particularly slow to recover from the 2007-2009 meltdown because of the centrality of residential mortgages and the housing market to that crisis.
Annual growth in the two categories appears to have peaked around the middle of last year, though both remain at around 10% or more – well above the historic average growth rate of about 6.5%.
(Graphic: Consumer vs commercial credit – https://www.reuters.com/graphics/USA-ECONOMY/BANKS/lgpdkjqwjvo/chart.png)
BANKS IN NEED
When banks find they cannot get the funding they need from traditional sources – one another – they turn to the Fed, borrowing from its “discount window,” long dubbed the lender of last resort.
In 2008, the explosion of its use was a clear signal that crunch had turned to crisis as it showed that banks, wary of the stigma associated with turning to the discount window, had run out of other options.
But the Fed has since taken steps to de-stigmatize the discount window, including lowering the penalty interest rate it traditionally charged. It saw widespread use during the early months of the pandemic and usage spiked again in the last two weeks after Silicon Valley Bank’s collapse.
(Graphic: Credit crisis: Banks turn to the Fed for cash – https://www.reuters.com/graphics/USA-FED/xmvjkbjzgpr/chart.png)
(Reporting By Dan Burns, Ann Saphir and Howard Schneider; Editing by Andrea Ricci)
