Credit Crunch Arrives: Bank Lending Crashes By Most On Record In Last Two Weeks Of March

Earlier this week, when looking at a critical real-time indicator of US loan activity - the Dallas Fed's latest Banking Conditions Survey - which provides an early glimpse into loan supply and demand at least until the next SLOOS is released in early May, we warned that loan demand had collapsed, while credit standards had tightened to the point where there was virtually no new credit supply for broad swaths of the economy. Here is the key quote from the survey:

Loan demand declined for the fifth period in a row as bankers in the March survey reported worsening business activity. Loan volumes fell, driven largely by a sharp contraction in consumer loans.... Credit standards and terms continued to tighten sharply, and marked rises in loan pricing were also noted over the reporting period. Banking outlooks continued to deteriorate, with contacts expecting a contraction in loan demand and business activity and an increase in nonperforming loans over the next six months. Some contacts cited waning consumer confidence from recent financial instability as a concern.

It goes without saying that a loan moratorium is a big problem for the US economy where 70% of growth comes from mostly credit-funded spending. But it's an even bigger problem for those small banks that had gotten hit especially hard during the recent bank crisis, and their customers: as we also discussed previously, banks with less than $250bn in assets are responsible for roughly 50% of US commercial and industrial lending, 60% of residential real estate lending, 80% of commercial real estate lending, and 45% of consumer lending. And with key segments of the economy locked out of critical lines of funding, GDP will crater and the US will spiral into a recession, just as the "inflation-fighting" Fed ordered.