Q3 Senior Loan Officer Opinion Survey Still Has a Bit of Tightening but Points to a Looming Tailwind
- On net, the SLOOS still showed some modest tightening (if taken literally as the share of banks tightening on net, which it should not fully be) across most loan categories.
- This has been the largest ever non-recessionary tightening seen in the SLOOS.
- Perhaps unsurprisingly given commentary from banks and credit market participants, the two categories which stand out as showing the most new or marginal tightening are credit cards and multi-family real estate loans.
- Consumer installment loans moved back to a neutral stance (a literal value of 0), while commercial and industrial loans ticked down to 8% of banks showing net tightening after a small but surprising bounce in the Q2 data to 16% (now just barely above its long-run average of 7%; most of the SLOOS show a small net average tightening bias).
- We are a long way from loan standards being easy in level terms though but “responses… indicate that banks’ lending standards have eased since 2023 for most loan categories, though they remained tight relative to their historical ranges.”
- Banks earnings season seems consistent with this data; CRE remains a key area of concern and, while still rising in level terms, consumer delinquencies and charge-offs are in the gradual process of leveling off and peaking either later this year or early next.
- The credit standards tightening impulse is probably currently a fairly modest overall net drag but moving gradually towards being neutral or a small tailwind to future growth, after being an important drag for the past 2 or so years.
- If a recession were to develop the SLOOS would probably show a decent move tighter but the extent of their non-recessionary tightening seen so far is, in my base case view of the world, a counter-cyclical force which has made the economy more robust to shocks rather than less by reducing the amount of leverage and the extent extent of embedded optimism in lending decisions.
Interpretively there is both a level and a change component in the SLOOS which matters for the impulse to the rest of the macroeconomy (technically one should read the SLOOS as a rate of change which cumulates over time but it’s a bit of a mixed effect in macro studies). Most measures of financial conditions show similar impacts from both rates of change and levels onto future activity outcomes. Another way of thinking about this is that the growth impact from the SLOOS is likely heading towards a neutral or slightly positive impact in the coming quarters but there is still a cumulative drag on the level of GDP.
The banks’ own answers to a question about the level of standards tightness suggests more of a rate of change effect is most important when thinking about the impacts of the SLOOS. Despite continued tightening value for the SLOOS since last summer (which should suggest a still tighter level of credit standards in general) across categories almost all banks reported a level of tightness that is still tight but easier than summer of 2023. Perhaps unsurprisingly, the most positive tones in the writeup for this section were for prime consumer loans (“moderate and modest net shares of banks reported that standards on prime credit card and prime auto loans were on the tighter end of their ranges, respectively”).
The SLOOS or credit standards channel of financial conditions tightening is an important and distinct one from rate level or more standard measures of financial conditions such as BBB spreads or the VIX. It tends to hit investment more directly (which bodes well given the relative strength of corporate investment over the past few years) and, unlike other financial conditions shocks, often has a fairly neutral impact on inflation because of the relative hit it imparts to the drivers of supply in the economy.
