New York: US bank lending contracted by the most on record in the last two weeks of March, indicating a substantial tightening of credit conditions in the wake of several high-profile bank collapses that risks damaging the economy.
Commercial bank lending dropped nearly $105 billion in the two weeks ended March 29, Federal Reserve data showed Friday. The more than $45 billion decrease in the latest week was primarily due to a drop in loans by small banks.
The pullback in total lending in the last half of March was broad and included fewer real estate loans, as well as commercial and industrial loans.
The report also showed commercial bank deposits dropped $64.7 billion in the latest week, marking the 10th-straight decrease that mainly reflected a decline at large firms.
The slide in lending follows the collapse of several firms including Silicon Valley Bank and Signature Bank.
Economists are closely monitoring the Fed’s so-called H.8 report, which provides an estimated weekly aggregate balance sheet for all commercial banks in the US, to gauge credit conditions. The recent bank failures have complicated the central bank’s efforts to reduce inflation without sending the economy into a recession.
On Thursday, the American Bankers Association index of credit conditions fell to the lowest level since the onset of the pandemic, indicating bank economists see credit conditions weakening over the next six months. As a result, banks are likely to become more cautious about extending credit.
The banking crisis has made a recession more likely, according to JPMorgan Chase & Co.’s Jamie Dimon. The bank’s chief executive officer said in an annual letter that the failures have “provoked lots of jitters in the market and will clearly cause some tightening of financial conditions as banks and other lenders become more conservative.”
The Fed’s report showed that by bank size, lending decreased $23.5 billion at the 25 largest domestically chartered banks in the latest two weeks, and plunged $73.6 billion at smaller commercial banks over the same period. Lending by foreign institutions in the US fell $7.5 billion.
The biggest 25 domestic banks account for almost three-fifths of lending, although in some key areas smaller banks are the most important providers of credit.
