It is the bank loan officer who is, with the help of the Fed, the person who creates the money we use and who maintains the level of supply. As we also know: “He who prints the money makes the rules”.
So, for one explanation as to why the equity markets rise and fall, we ought to turn to the Senior Loan Officer Opinion Survey on Bank Lending. It happens to be a monthly Fed report.
Over the past 16 years in the U.S. there have been four periods of equity market shake-outs – 1990, 1994, 1998 and 2000 -- but 2000-2002 was the most severe. In the chart below, look at the light blue shaded indication of the banker’s willingness to lend – yes, the turndown periods were clearly 1990, 1994, 1998 and 2000 -- and 2006.
Now whether the market tanked because of credit tightening or whether there was a tightening on account of a slowing economy, patterns of spending that exceeded income, falling collateral values, etc, is not my point. I am simply saying that banks tighten credit at times that equity prices are falling.
So to find if banks are tightening, let’s turn to the current (October) Fed survey of commercial bank loan officers. There were 55 banks responding.
Question: What is your bank’s outlook over the next 12 months for delinquencies and chargeoffs on your Commercial & Industrial loans (unrelated to finance M&A activity), assuming that economic activity progresses in line with consensus forecasts?
Answer: Loan quality is likely to deteriorate (36.5 pct) versus respondents who believe it will remain stable (61.5 pct)
Question: Over the past 3 months, how have your bank’s credit standards for approving applications for commercial real estate loans changed?
Answer: Standards have tightened (41.8 pct); remained unchanged (52.7 pct); and eased somewhat (5.5 pct). But for the April Survey, these numbers were 18.2 pct tightening and 81.8 remaining unchanged. So, over 6 months, clearly the banks have been tightening.
Question: Apart from seasonality, how has commercial real estate loan demand changed over the past 3 months?
Answer: Demand is weaker (32.7 pct); about the same (61.8 pct); and stronger (5.5 pct). In April weaker demand was noted by 27.3 pct of responding banks, so demand is falling away.
This data can be found at the Fed. Simply change the month to come up with other monthly reports.
The economists of the major Wall Street firms publish this kind of material, but I think that self-directed readers who don’t have access to the reports of the major firms can easily pull off some of the most important data from government sources in any case.
The key is to know what datapoints are worth tracking month over month. As I say, I think willingness of senior bank loan officers to lend is an important one.
After all, He Who Prints The Money…