The tightening of credit terms and conditions, both feared and desired, materialized at an accelerated pace in the first quarter. It accompanies a sharp increase in insolvency cases.
Are central banks cause for celebration? It has already been written that a US banking sector under strong pressure has the effect of accentuating the effects of monetary austerity and the deterioration of credit conditions and the cost of credit. Obtaining loans is becoming more difficult and more costly, which magnifies the effect produced by the strong rise in the key rate, itself amplified by the end of quantitative monetary easing.
On May 5, the Governor of the Bank of Canada, Tiff Macklem, was rather concerned. Given the high level of household indebtedness, “if financial stress were to lead to a larger than expected and persistent tightening, we should take this into account in our policy rate decisions”, he said.
The day before, it was possible to deduce from the remarks of the president of the American Federal Reserve (Fed) that the banking crisis also brings unexpected support to the fight against inflation. By ordering a further 25 basis point increase in its key rate, the Monetary Committee notably underlined that “the tightening of credit conditions for households and businesses is likely to weigh on economic activity, hiring and inflation “.
These conditions are rapidly tightening. In the United States, a survey of senior loan officers (the Senior Loan Officer Opinion Survey on Bank Lending Practices) found that more banks tightened their credit terms on a wider range of prime loans quarter. It’s no surprise, but the main concern comes from the fact that they say in this survey that they want to tighten further, “which would penalize businesses and households and accelerate the march towards recession”, retains the analysis firm Oxford Economics. .
The share of banks tightening their commercial and industrial lending standards was 47% in the first quarter, only slightly higher than in the fourth quarter of 2022 (44%). That’s a far cry from the 60% estimate cited in a Dallas Federal Reserve poll. “But the outlook foreshadows an increased movement to tighten standards and criteria for the rest of the year, and this, more directly towards SMEs”, known to be strong job creators.
Among the most important causes cited are the deterioration in the value of collateral and the decline in the quality of credit in portfolios, at the rate of the deceleration in economic activity. For institutions, there is talk of reduced risk tolerance and concern about funding costs, liquidity levels and deposit outflows.
Demand for loans is also falling, with 46% of institutions reporting lower demand, “the highest percentage since 2009,” says analyst Edward Moya. Notably, 53% of banks report weaker demand from SMEs, a similar percentage to that seen at the bottom of the 2008-2009 recession. And 70% report declining demand in the commercial real estate loan segment, the highest percentage since mid-1990.
Among individuals, 53% of banks report lower demand for mortgages. However, this percentage rose to 93% in the fourth quarter of 2022 when interest rates peaked, Oxford said. Also, 15% of banks report weaker demand for consumer loans, compared to 26% in the fourth quarter of 2022, which could also reflect the economic slowdown.
“This portrait is sufficient to justify a pause in the hike in the Fed’s key rates,” concludes Oxford.
Same observation in Canada
At home, the results of a similar survey, published by the Bank of Canada last Friday, show a sharp deterioration in general lending conditions in the first quarter, after they have remained in “Easing” territory since the second quarter of 2020, when the pandemic officially began. The tightening measured on the mortgage side is three times higher than that in the non-mortgage segment. And it wants to be felt just as much, if not more so, with regard to tariff and non-tariff terms.
For businesses, there is also talk of an acceleration, but milder, in the deterioration of credit conditions after a move into “Tightening” territory in the third quarter of 2022. And of a less pronounced, but still real tightening modalities.
Sharp rise in insolvency
Meanwhile, figures released last week by the Office of the Superintendent of Bankruptcy indicate that the number of consumer insolvency cases in Canada increased by 28.4% in the first quarter of 2023 compared to the same quarter of the previous year. , “marking the largest year-on-year percentage increase since 2009.”
Among businesses, the number of insolvency filings continued its upward trajectory in the first quarter with an increase of 32.6% over one year. This is the fifth quarter in a row in which it has increased by more than 30% year on year, according to the Canadian Association of Insolvency and Restructuring Professionals.