Bank Lending Restarting

Bank lending came to a standstill amidst aggressive hikes, but now appears to be resuming as the market increasingly anticipates a rate cut cycle.

Recall, a tremendous bank lending boom occurred in 2022 as rates remained low and fiscal stimulus supercharged the economy. In 2023, bank lending was very subdued and loan growth was almost non-existent. Demand for loans was discouraged by higher interest rates, while the supply of loans was impacted by trauma from the regional banking panic.

However, bank lending has steadily resumed in recent months as interest rates (longer-dated bond yields) have declined. Loan growth is not as rapid as 2022, but appears to be normalizing towards a pre-pandemic pace.

Loan growth may further accelerate as the supply of loans increases with gradual lowering of bank lending standards.

The Fed’s most recent Senior Loan Officer Survey survey shows that banks had been gradually tightening their lending standards throughout the hiking cycle, but are now moderating the pace of tightening. History suggests banks are at a turning point where they are set to gradually loosen lending standards.

The survey also shows demand for loans declined throughout the rate hiking cycle, but appears to be poised to resume growth. The decline of the 10 year yield from as high as 5% last year to below 4% today is likely driving the change by both increasing loan demand and reducing the credit risk of borrowers.

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