US bank lending and deposits rise signalling stability

US bank lending rose for the first time in three weeks and deposits increased, suggesting credit conditions are stabilising after a string of bank failures last month.

Commercial bank lending increased $10.2 billion in the week ending April 5, according to seasonally adjusted data from the Federal Reserve out Friday. On an unadjusted basis, loans and leases fell $5.6 billion.

Bank deposits climbed by nearly $61 billion. Before seasonal adjustment, they increased $75.2 billion. Deposits had been gradually retreating since peaking in April last year, but the pace of that decline accelerated in March.

The gain in adjusted lending reflected increases across banks of all sizes. Commercial and industrial loans picked up for the first time in three weeks, and commercial real estate lending improved slightly. Residential real estate loans eased.

In the latest week, the pickup in deposits reflected increases at both large and small banks, as well as foreign institutions. In a welcome sign, deposits at smaller banks rose by the most this year, although they still remain well below levels seen before the recent financial stress.

To gauge credit conditions, economists are closely monitoring the Fed’s so-called H.8 report, which provides an estimated weekly aggregate balance sheet for all commercial banks in the US.

Lending is key to business growth and spending, and tighter loan standards are seen as a growing headwind for the economy in the months ahead.

For all of March, bank lending increased at a seasonally adjusted annualised rate of 5.7 per cent. Deposits, however, plunged at an almost 22 per cent pace — the largest monthly slide since 1981, as more funds flowed into money-market accounts.

The data come just hours after JPMorgan Chase, Citigroup and Wells Fargo kicked off the industry’s quarterly earnings reports, with each finding ways to benefit from high interest rates. JPMorgan saw a surprise increase in deposits, and all three firms said income from lending jumped from a year earlier.

However, there are some signs of stress. Citi said provisions for loan losses more than doubled and JPMorgan boosted its pile of reserves for potentially soured loans.

“Evidence increasingly points to the banking-system turmoil remaining well contained, and the reprieve from accelerated deposit outflows is a welcome development for financial stability. Nevertheless, we expect the banks to continue contributing to tighter financial conditions by raising lending standards,” Bloomberg economist Stuart Paul said.

The slew of bank collapses led Fed officials to dial back expectations of how high they’ll need to lift interest rates, according to minutes of the central bank’s March meeting released earlier this week.

Taking into account an expected tightening of credit conditions for households and businesses, Fed staff advisers are now forecasting a “mild recession” later this year. Inflation, while showing some hints of moderation, remains well above the Fed’s two per cent target.

It’s important to note that the H.8 report focuses on the commercial bank universe. When assets are divested to nonbank institutions — like in the case of the assets retained in receivership following the failure of Signature Bank — it can distort the picture.

The report is primarily based on data reported weekly by a sample of about 875 domestically chartered banks and foreign-related institutions.