ING Bank’s European rates analysts are urging participants across financial markets to factor the likelihood of a US ‘credit crunch’ into their forecasts, despite seeing signs of a systemic banking crisis abating.
One of the Dutch bank’s leading analysts also told Real Estate Capital that, while European banks are likely to maintain higher levels of lending than their US counterparts, credit conditions are nevertheless becoming tighter, including for commercial real estate borrowers.
Antoine Bouvet, head of European rates at ING, said in a blog post on 29 March that while the hunt for “hairline fractures” by investors in “every bank’s balance sheet and business model” since the collapse of Silicon Valley Bank had diminished, it was expecting a credit crunch – a decline in lending activity by financial institutions brought on by a sudden shortage of funds.
However, markets are not currently predicting the same level of credit contraction in Europe, he tells Real Estate Capital Europe. Bouvet explains: “Based on conversations I have with colleagues, clients, and peers… the market is less worried about a credit crunch in the eurozone than in the US. Things can change of course.”
Bouvet said in the blog post that lenders in the eurozone had managed to “stay in the periphery of banking worries… and we hope this will remain the case”.
ING’s analysis is that broader systemic stress indicators in Europe did not get to critical levels, or rise above that seen during 2022, especially in the money markets, pointing to sovereign spreads as an example: “The yield differential between 10-year German bonds…the former didn’t even rise to 200 basis points, a level long considered the floor in a period of aggressive monetary tightening,” ING said.
But Bouvet also wrote: “Every day that passes, reinforces the market’s, and our, conviction that a line has been drawn under systemic banking worries. Of course, such statements only apply to near-term liquidity risk of individual banks. What remains, as the dust settles, is greater macroeconomic angst. Markets now need to factor in a greater likelihood of a credit crunch in their forecast.”
He said ING was “in the camp” of those expecting a further contraction in credit in the US, partly owing to the responses of major US banks to a survey of lending officers by the Federal Reserve during the last quarter of 2022, which indicated lenders were already tightening loan standards and seeing reduced demand for credit from both businesses and consumers.
The US central bank reported in its January Senior Loan Office Opinion Survey that the threshold to get credit rose for commercial real estate borrowers, as well as other commercial and industrial firms.
Bouvet says lending conditions will be further impacted by higher funding rates for banks following the turmoil sparked by the takeover of SVB by the Federal Deposit Insurance Corporation in the second-biggest bank failure in US history.
“Banks are feeling the pinch from the deposits outflows, but markets have also repriced credit risk towards these lenders, especially regional banks, which leads to higher funding costs and therefore a tightening of credit or higher lending rates,” Bouvet says.
Despite a credit crunch looking less likely for European lenders, Bouvet says eurozone banks were tightening credit conditions as demonstrated in the European Central Bank’s latest Euro Area Bank Lending Survey, which showed contracting credit conditions for commercial real estate borrowers in the region in Q4 2022.
“Even the Q4 2022 survey was already showing signs of tightening credit conditions, so I think the conclusions are similar for both the US and eurozone: access to credit was getting more difficult even before the onset of the US regional bank crisis,” Bouvet says.
The ECB reported in its January BLS report that European banks had seen the biggest net decrease in demand for loans or credit lines for commercial real estate compared with all other economic sectors during the second half of 2022.
Bouvet says bank lenders are being driven to stricter credit standards for borrowers, including commercial real estate companies, due to higher funding rates, and a greater risk aversion following the recent market turmoil.
“Regional banks account for a disproportionately large market share of commercial real estate lending in the US,” Bouvet says. “At the same time, banks are feeling the pinch from deposits outflows and also potentially higher funding rates because of high deposits. Markets are also repricing credit risk of these banks. All these factors contribute to higher funding risks, which will result in a tightening of credit.”
Earlier this week, forecasting firm Oxford Economics said the banking sector turmoil, which saw UBS buy its Swiss rival Credit Suisse for $3.25 billion, would lead to a tightening of credit conditions and a sharper decline in property values in 2023 than it had previously predicted.