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Lending by banks rose slightly last week pointing to some stabilization in the U.S. financial system one month after the failure of Silicon Valley Bank.
Total bank lending rose by $10.2 billion to $12.08 trillion in the seven days ended April 5, the Federal Reserve reported Friday. Most of the increase took place at larger banks. This is the first increase in three weeks.
On the other hand, bank deposits rose by $61 billion last week to $17.3 trillion.
Both large and small banks took in more than $20 billion in new deposits.
Key details: Commercial and industrial loans rebounded by $6.6 billion last week to $2.8 trillion.
These loans had tumbled by nearly $70 billion in a two-week span in late March after the failure of California-based SVB.
All figures are taken from the Federal Reserve’s weekly H8 survey and are seasonally adjusted.
The collapse of SVB in early March triggered a big outflow of deposits. Yet even before the failure of SVB, bank deposits had been shrinking as rising interest rates spurred customers to seek higher returns for their money, for instance, from money-market funds.
Deposits peaked at a record $18.2 trillion in the spring of 2022 before starting to wane. They since contracted by almost $1 trillion.
Economists predict that trend will continue.
Big picture: The Fed and Wall Street are monitoring money flows to see if more cracks appear in the U.S. economy.
Lending is likely to continue to weaken, economists say, as banks tighten borrowing standards and seek to shore up their own financial positions. If lending pulls back sharply, there are fears it could lead to a credit crunch.
They point out that banks actually began to tighten lending standards well before the recent stress on the financial system, a trend that typically spells trouble ahead.
“The economy is getting weaker,” said chief economist Steve Blitz at TS Lombard.
“Small banks are shrinking their balance sheets, which is not good for mainstream America,” he added. “They don’t lend to Toyota and GM
GM,
and IBM
IBM,
They lend to your small-town auto dealer or local real estate.”
Lael Brainard, one of President Biden’s top economic advisers, said this week that banks are showing some signs of pulling back a little on credit.”
Treasury Secretary Janet Yellen, however, said it was important not to “overdo the negativism” about the economy.
Looking ahead: “The economic costs of what are going now won’t show up till later in the year,” said chief economist Ryan Sweet of Oxford Economics.
The small uptick in lending and deposits is a good sign, but “there is no clear takeaway,” said chief economist Lou Crandall of Wrightson ICAP.
He said it’s too soon to tell how much the banking system was hurt by SVB and how much it’s recovered.
Market reaction: Stocks
DJIA,
SPX,
closed lower on Friday before the data was released on hawkish Fed comments and downbeat retail sales. The yield on 10-year Treasury notes
TMUBMUSD10Y,
moved up 7 basis points to 3.52%.
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