Meanwhile Behind The Scenes: Banks Quietly Slash Loans As They Prepare For The Next Recession

Reading through the Fed's latest Senior Loan Officer Opinion Survey (SLOOS), revealed absolutely nothing to be concerned about when it comes to loan demand and loan standards (aside from a warning that a yield curve inversion would, predictably, result in substantially tighter financial conditions): as we noted one month ago, the net percentage of banks reporting easier standards on loans to large- and medium-sized firms stayed flat at 16%, while standards for small firms were basically unchanged on net. At the same time, terms on C&I loans eased somewhat for large- and medium-sized firms, as 27% of banks surveyed (in net terms) reportedly narrowed spreads of loan rates over the cost of funds; other terms, such as premiums charged for riskier loans, loan covenants, and collateralization requirements, all eased somewhat.

There is just one problem with the above: none of it is true.

In fact according to a Reuters investigation, when looking behind headline numbers showing healthy loan books, "problems appear to be cropping up in areas such as home-equity lines of credit, commercial real estate and credit cards" according to federal data reviewed by the wire service and interviews with bank execs.

Worse, banks are also starting to aggressively cut relationships with customers who seem too risky, which in a time when 3M USD Libor just hit a fresh decade high despite a flattening in short-term TSY yields, is to be expected: after all financial conditions in the real economy, and not the markets, are getting ever tighter and the result will be a wave of defaults sooner or later.

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