Banks Tighten As Economic Outlook Grows More Uncertain

Each quarter the Federal Reserve conducts a survey of as many as "eighty large domestic banks and twenty-four U.S. branches and agencies of foreign banks" regarding "changes in the standards and terms of the banks' lending and the state of business and household demand for loans."

The current data, which was just released on Monday, May 2nd for the first quarter of 2016, reveals two things: 1) banks are now in a tightening, not loosening, posture and 2) are the tightest they've been for the past 5+ years.

Though many have cited weakness in the energy sector as a primary (and, perhaps, isolated) concern, this does not seem to be the case for increased bank tightening since, according to the current survey, the "majority of domestic banks reported that loans to firms in this sector account for less than 5 percent of their outstanding C&I loans."

Instead, banks reported a "less favorable or more uncertain economic outlook" as a source of tightening in addition to worsening "industry-specific problems".

On the positive side, banks reported "easing lending standards on credit cards and other consumer loans" with "stronger demand across all consumer loan categories." That being said, it is difficult to justify an overly optimistic view of US consumers if banks continue to tighten up on businesses, especially under a less favorable or more uncertain economic environment.

Given numerous signs of a possible 2016 market top and recession next year, we continue to believe a defensive posture towards equities is warranted.

For a complete archive of our podcast interviews on finance, economics, and the market, visit our Newshour page here or iTunes page here. Subscribe to our weekly premium podcast by clicking here.

About the Author

fswebmaster [at] financialsense [dot] com ()