We're now entering the third phase

Sometimes things happen all at once but mostly they happen in stages or, phases, of development. There's usually a gestation period after something breaks out into the open like the banking crises did with SVB and Signature banks, the events that happen during the interim aren't on TV News but can be seen but those who work in the industry in their meetings with co-workers and interactions with management. That is why I pay close attention to things those people say and do because they are equipped with more information than anyone else.

"Phase one was an asset/liability mismatch at several banks (They owned 1% Treasury bonds that were underwater like every other bank!)

Phase two began with the stock market deciding to do its own supervisory scrubbing (Wall Street figured out which banks were weak and shorted their shares)

We are now heading into the third phase.

Bank leadership at small and midsize banks are considering how to shrink their loan books in order to address the mark-to-market loss of capital, as well as to guard against potential deposit instability in the future.

Bank leadership is very aware that the economy is slowing, and that we are likely about to enter a challenging credit environment.

While asset/liability mismatches are relatively easy to spot, assessing the quality of loan portfolios is much more complicated.

CEOs of many small and midsize banks are in a tough position.

They can't easily raise equity because their stock prices are down.

As a result, they are turning to shrinking their loan books, finding places to pull back on existing loans and future loan commitments.

This is making it much harder for small and midsize businesses to get and keep their bank loans. (!!)

It is a quiet phase that won’t make headlines but is nevertheless relentlessly going on beneath the surface."

- Robert Kaplan, former head of the Dallas Fed.

The part about the small and mid-size companies having difficulty securing and/or keeping lines of working capital available even with higher cost money is a fact I'm intimately aware of and I see it every day as I review requests from owners. The tightening has just begun and, as long as we're above 5% (or even above 2% for that matter) it will continue to remove capital availability for most business owners.

Most people understand that smaller banks are natural allies of small - mid size businesses and what the recent disastrous Fed's response to recent bank failures has shown is that the small, regional banks are more vulnerable not because they're smaller but rather because they are being targeted in favor of the bigger banks. Did you know that in the mid-80's there were almost 15,000 small regional banks and today there are less than 4200? The consolidation of more banking choices into fewer ones has been happening for decades.

Free to speak his mind, Kaplan concludes rather ominously, ‍

"the recent banking turmoil has highlighted the disparity between too-big-to-fail banks and smaller and midsize banks. I worry that increasing the Fed funds rate from here may create further strains on the deposit base for those smaller banks. I’m concerned that, as the Fed raises rates, it is tightening the vice on small and midsize banks and the small and midsize businesses that rely on those banks for funding."

Meanwhile we all get subjected to the press corps Kabuki Theater of the "debt ceiling" as if the government running out of checks from OUR CHECKBOOK would be a really bad thing!

"The current Kabuki theater farce regarding the raising of the debt limit is a perfect example of how spineless politicians blatantly deceive the public, with the full support of the regime media, in proclaiming spending cuts and fiscal responsibility, when the CBO projections show the national debt growing to more than $50 trillion in the next ten years, as most of the spending is on automatic pilot. And this is before the coming recession/depression provokes the usual political response of fiscal stimulus, which will drive the debt higher."

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No accountability, ever:

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Release the SLOOS! - The Senior Loan Officer Opinion Survey (SLOOS) Report Reveals Tightening Trends

"On top of capacity issues in the CRE lending market, borrowers needing financing are now also facing a knock-on challenge of broadly tightening loan underwriting standards. The timing of this is less than ideal as a hefty wave of CRE loan maturities approaches, some of which are backed by struggling assets."

There are 2 big takeaways from the SLOOS report:  

1. A large majority of CRE lenders are tightening lending standards; 64.5%, 66.7%, and 73.8% of multifamily, non-farm non-residential CRE, and construction lenders respectively. Charts 1, 2, and 3 below (compiled by our counterparts at Moody’s Investor Service) show the percentage of banks reporting tightening lending standards is hovering around a 10-year high.

2. The most common ways the tightening occurred were higher interest rate spreads, lower LTVs, and higher DSCR requirements. Additionally, loan officers in at least one of the surveyed banks also cited becoming more restrictive with maximum loan sizes, maximum time to maturity, market areas served, and maximum interest-only periods.

Ok so, the trends are clear however the solutions are also clear! Private lenders are filling more of the capital needs for business owners while dealing with the banking issues at the same time. There is capital available and rates (when available) haven't changed much at all. In fact, in some cases they have gone DOWN for higher credit profile owners.

Call to discuss your projects, expenses and any capital needs you're business is experiencing. I return all calls.