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NEW YORK Feb. 20, 2009--The popular belief is that U.S. banks have been unwilling or unable to lend due to capital constraints or a desire to avoid risk, leading to a credit crunch. We can define a credit crunch as a time when creditworthy borrowers generally cannot obtain financing. If the U.S. had entered such a time, we would expect to have seen some contraction in the amount of credit outstanding in the economy. But the data on credit outstanding in the U.S. has so far only tenuously supported the idea that the U.S. has indeed experienced such contraction in credit says Standard & Poor's Rating Services in a report, "It's Crunch Time: Evidence That The Credit Contraction Is In Its Early Stages," published on Feb. 18, 2009.
"While the amount of borrowing by the various sectors of the economy has continued to grow, albeit unusually slowly, there are early indications that a further slowdown is becoming apparent," said Standard & Poor's credit analyst Tanya Azarchs.
Banks are making fewer and fewer commitments to lend, and new issues of bonds and securitized assets have slowed to a trickle. We believe this portends a contraction in total credit available in the coming months. Since this lack of lending may have serious implications for the economy, the U.S. government has been devising policies that would encourage banks to lend. Lending pressures also are prompting Standard & Poor's to pay close attention to the two most important factors affecting our ratings for U.S. banks and the health of the banking system as a whole: the ability of banks to make any loan they consider prudent, and a healthy overall economic environment.
The slowdown in lending to date has a few possible explanations:
-- Banks are not able or willing to lend due to capital constraints or a lack of liquidity in secondary or securitization markets for those loans;
-- The number of creditworthy customers has declined due to economic pressures; or
-- The demand for credit has fallen, as it naturally does when investment opportunities dim in recessionary times and loan spreads widen.
It's difficult to determine which of these factors are most in play. But we believe that sharp increases (or the prospect of such) in loan losses--a lagging indicator of a rise in the number of less-than-creditworthy borrowers--have played a significant role in retarding lending. That's because the loan categories in which credit contraction is most evident are those that are experiencing mounting losses. Indeed, 92% of those who took part in the U.S. Federal Reserve Board's (FRB) January 2009 Senior Loan Officer Opinion Survey reported that this increase in losses was an important factor in their tightening of lending terms. On the other hand, 73% of officers deemed capital constraints to be an unimportant factor in the lending patterns.
"In any event, none of the data support the anecdotal reports of a system-wide dearth of available credit. What's behind the apparent difference between perception and reality? It may be that, while growth in overall credit was positive through at least third-quarter 2008, it has risen at a slower pace than at any time since 1945--far below the 8%-10% rate in most years. Not even during past recessions have we seen such a low growth rate. Loans are being replaced as they mature, but little net new growth is occurring. That could mean that the slowdown in lending is just an opening act, and a true credit crunch may yet take the stage," Ms. Azarchs added.
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