The Federal Reserve's quarterly Senior Loan Officers Opinion Survey on Bank Lending Practices (SLOOS) is one of the more reliable indicators of credit conditions (for commercial and industrial lending) that we look at to reckon proximity of equity market tops or the peak of an economic cycle. It also works well to time troughs in markets and economic activity (see the chart below which shows the results of a strategy of selling/buying S&P 500 at the 90th/10th percentile reading of this survey).
Buy/Sell S&P 500 based on the level of the Senior Loan Officers Opinion Survey
The January 2019 survey reported that lending standards to large firms were little changed over the previous three months (balance of responses +2.8% tighter). Hence, for the first time in seven quarters, lending standards to large firm have not been eased. However, relative to the same survey made in the previous quarter, this represents a large 18.7% swing from the relatively easy lending conditions in 3Q to moderately tight lending conditions in 4Q. A move of similar magnitude occurred during the Eurozone crisis (late 2011, see chart below), when two consecutive SLOOS surveys showed tightening of credit conditions.
Changes in bank credit standards
Tightened minus eased, %
In the context of a Federal Reserve that has been tightening policy, this is somewhat concerning. In addition, the recent European Central Bank survey also indicated that credit conditions were being tightened in Europe. The situation bears watching closely over the coming quarters but is not yet one that causes us alarm, for the following reasons:
* A +2.8% balance of opinion for tighter lending to large firms simply suggests that credit conditions were little changed (and credit condition have been eased over the preceding quarters).
* Another timely measure of credit conditions, the bank credit impulse, has actually been strengthening lately.
US credit impulse
Year-on-year, % of GDP
* Steep declines in equity markets and the widening in credit spreads could have influenced lending practices toward tighter standards due to risk aversion—that is, a situation where the move in credit standards is coincident with risk markets declines (a similar episode occurred during the Eurozone crisis). The responses may also have been affected by the contemporaneous sharp decline in oil prices. However, since the survey is anonymous we cannot reach any definitive conclusions.
* According to our analysis, only a substantial tightening in credit conditions leads to declines in the equity markets, such as a balance of responses of +40% and more toward tighter credit conditions, i.e., economic and market performance is more reliably linked to the level of this survey than it is to changes in it.
Author: Vinay Pande, Head of Trading Strategies, UBS Financial Services Inc. (UBS FS) Jerry Lucas, Strategist, UBS Financial Services Inc. (UBS FS) Yang Tang, Strategist, UBS Financial Services Inc. (UBS FS) Miguel Costa, Strategist, UBS AG
CIO Strategists around the world comment on critical issues
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Appendix
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