Tightening Credit Standards
With all the money floating around through federal giveaways, one might think banks are also feeling equally generous towards potential borrowers. In fact, that's not the case as many institutions have tightened lending standards in anticipation of a credit crisis due to pandemic economic conditions.
What this means for investors is that there is another factor beginning to impact economic growth. If current borrowers’ default and those looking to get loans are not able to qualify, you will tend to have a situation where consumption falls. In an economy with 70% consumption, that means slower economic growth.
Slow economic growth means that interest rates likely will remain low and equity returns could very well be impacted as company earnings are affected by a slowing in overall economic activity. This is another factor we are considering as we develop investment strategy. This is why we are focused on the types of assets we currently invest in: companies with strong cash flow (many paying dividends) and companies that will be able to pass through the current economic challenges.
This week’s audio link is a description of my thoughts on current lending conditions. You can listen to that here:
A recent CNBC article outlined this issue. I expect you will continue to hear more on this developing situation as economic challenges continue. A few excepts are as follows:
“Despite rock-bottom interest rates, banks are tightening lending standards across the board, shrinking the availability of credit. “If you can get a loan, then the price of it is going to be relatively low,” said Tendayi Kapfidze, chief economist at LendingTree, an online loan marketplace. “The challenge right now is access.”
For example, credit card rates are down to a three-and-a-half-year low of 16.22%, according to Bankrate. Yet banks are making credit cards much harder to get in the wake of the coronavirus pandemic, according to Matt Schulz, chief industry analyst at CompareCards.
As conditions worsen, credit card issuers have begun closing accounts and lowering credit limits, particularly on those accounts that are at a greater risk of becoming delinquent.
One-quarter of all credit cardholders, or just under 50 million people, saw their limit slashed or their card closed altogether in the past 30 days — a number so high that CompareCards reran the survey to verify its accuracy, according to Schulz.
“It just goes to show the enormity of the impact of this outbreak on the economy, and on banks and on cardholders,” he said.
Source: May 13, 2020, CNBC.com