Fed’s Beige Book: The Credit Crunch Has Arrived in New York, California and Texas

Gunnar Larson g at xny.io
Fri Apr 21 06:59:53 PDT 2023


By Pam Martens and Russ Martens: April 20, 2023

On Wednesday, the Federal Reserve released its Beige Book, a compilation of
current economic conditions in each of its 12 Federal Reserve districts.
The information that was collected in each of the regional reports was
gathered on or before April 10 – so it is relatively current.

It is not a good sign that three of the Fed districts that pump out a
significant chunk of U.S. GDP reported that bank credit had tightened
noticeably, ostensibly as fallout from the banking collapses in March and
depositor runs.

The New York Fed reported that credit conditions in the Second Fed
District, which includes New York state, the 12 northern counties of New
Jersey, Connecticut’s Fairfield County, Puerto Rico and the U.S. Virgin
Islands, “deteriorated sharply.” It summarized the situation as follows:

“Conditions in the broad finance sector deteriorated sharply coinciding
with recent stress in the banking sector. Small to medium-sized banks in
the District reported widespread declines in loan demand across all loan
segments. Credit standards tightened noticeably for all loan types, and
loan spreads continued to narrow. Deposit [interest] rates moved higher.
Finally, delinquency rates edged up on residential and commercial

One of the banks that failed in March and was put into receivership by the
Federal Deposit Insurance Corporation (FDIC) was Signature Bank, which was
headquartered in Manhattan. Signature Bank was the third largest bank
failure in U.S. history.

The San Francisco Fed, whose District has been the epicenter of collapsing
banks and/or their share prices, reported the following regarding credit

“Lending activity fell significantly in recent weeks amid higher interest
rates and elevated uncertainty in the banking sector. Lending standards
tightened notably, and several depository institutions opted to reduce loan
volumes, especially for new clients, despite reporting ample liquidity.
Reports indicated that existing and planned projects across sectors were
delayed or cancelled due to higher funding costs, heightened uncertainty,
and more limited access to credit. Following recent volatility in deposit
levels at regional and community banks, outflows have reportedly stabilized
since late March.”

The second largest bank failure in U.S. history, Silicon Valley Bank,
occurred in March in this District. See our report: Silicon Valley Bank Was
a Wall Street IPO Pipeline in Drag as a Federally-Insured Bank; FHLB of San
Francisco Was Quietly Bailing It Out. (The largest bank failure in U.S.
history was Washington Mutual, which occurred during the financial crisis
of 2008.)

A federally-insured bank that had immersed itself in crypto-related
deposits, Silvergate Bank, headquartered in California, also failed in
March but was allowed to wind itself down. There continue to be growing
concerns about the survivability of San Francisco-based First Republic
Bank, whose stock price has lost 90 percent of its value year-to-date. See
our report from yesterday: Liquor Sales Will Be Brisk on Wall Street Ahead
of First Republic Bank’s Earnings Report on Monday.

Although it was not clear why, the Dallas Fed also reported a particularly
dour outlook in its district, writing as follows:

“Loan demand continued to decline in March as bankers reported worsening
business activity. Loan volumes fell, driven largely by a sharp contraction
in consumer loans. Loan performance worsened slightly overall. Credit
standards and terms tightened sharply, and marked increases in loan pricing
were noted. 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. Increased
uncertainty and lack of confidence resulting from the recent banking issues
were cited as concerns.”

The revelations in the Beige Book are compatible with the Fed’s separate
data on total bank credit at all commercial banks, which plunged by $300
billion between March 15 and April 5, the latest data available. That is a
dramatic decline in the span of three weeks. (See chart above.)
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