March 26, 2024 — New data on bank lending shows just how tenuous the situation is for companies and the economy as a whole as the world waits to see whether the U.S. Federal Reserve will cut interest rates in 2024. 

In December 2023, Fed officials told the market to expect three rate cuts in 2024. Hotter-than-expected CPI reports in January and February then called that projection into question. Most recently, during the March 20th Fed rate decision meeting, it was determined that while unemployment rates have remained low and inflation has eased over the past year, there was not enough progress for the Committee to make a definitive decision to cut rates at this time. Ultimately, though, the Fed has penciled in three rate cuts in 2024, sticking with its earlier forecast, with greater confidence that inflation will continue to move toward the Fed’s 2% goal. 

A course reversal from the Fed would have severe implications for U.S. companies and banks. “Although the U.S. economy is growing at a solid pace, lending markets were showing clear signs of stress,” says Gregory Schneider, Director, Commercial Loan Analytics at Coalition Greenwich. “Risk levels were rising in bank loan portfolios and loan pricing was climbing.”

Those are critical indicators for economic direction. Tighter bank credit standards are reducing overall lending activity—a process that, if it continues, will contribute to slower economic growth. Banks are relying on Fed rate cuts to break that cycle by stimulating corporate loan demand and keeping the economy on a trajectory for growth.  

Risk Levels Rising in Bank C&I Loan Portfolios
According to Commercial Loan Analytics (CLA) data in Q3 2023, high-risk loans made up 10% of bank commercial and industrial (C&I) loan portfolios. In Q4, that share more than doubled to 21%. “Deterioration in loan portfolio quality is undoubtedly contributing to tightening in bank lending standards,” says Gregory Schneider. 

For companies, tighter lending standards mean higher prices as banks move to compensate for the increased risk in their portfolios. SOFR spreads on C&I loans started climbing in mid-2023, increasing by about 5% by the end of Q4 relative to the beginning of Q3, according to according to new CLA data.

Falling Demand, Lower Loan Volumes
Although a dip in SOFR spreads in December could suggest that some relief is on the way, increased pricing had an impact on loan demand in Q4. U.S. C&I loan volumes contracted by 1.1%, or roughly $18 billion, in the last three months of 2023. 

Greenwich Commercial Lending Market Insight is a quarterly review of data and analytics from the Coalition Greenwich Commercial Loan Analytics team.