Was America’s much-hyped “credit crunch” a mirage?

As most regular readers will recall, Fed data covering the week to March 29 showed a second consecutive large contraction in bank lending, concentrated in C&I and CRE.

The figures made sense in the context of recent “banking developments” (to employ the language used nearly a dozen times in the March FOMC minutes) and served as the basis for many a dire-sounding headline, including the one I used while editorializing around the numbers.

But, according to Goldman’s Michael Cahill, the decline in lending might’ve been a “phantom drop.”

Note from the visual that the total decline in small banks’ C&I and CRE lending during the two-week period ended March 29 was around $67 billion. Nearly $50 billion of that came during the week to March 22.

Below, find Goldman’s Cahill explaining what likely accounted for that.

The Fed reported a divestment of $87 billion of assets in the week ending March 22, split between loans ($60 billion) and securities ($27 billion). Supporting documentation from the FDIC and Flagstar Bank makes it clear this refers to Signature Bridge Bank, and we can subsequently trace this through the H.8 data to find this is likely almost entirely responsible for the apparent drop in loans and partially responsible for the decline in MBS assets. Specifically, on March 19, the FDIC “entered into a purchase and assumption agreement for substantially all deposits and certain loan portfolios of Signature Bridge Bank, National Association, by Flagstar Bank, National Association.” Flagstar Bank noted that the “certain loan portfolios” consisted entirely of C&I loans, while it did not acquire about $60 billion of loans (split between CRE and C&I loans) previously held by Signature Bank. This is consistent with the FDIC’s assertion that approximately $60 billion of loans would stay with the FDIC to be sold later. On the securities side, the FDIC later revealed it still holds $27 billion in securities (primarily AMBS, CMOs, and CMBS) from Signature, so both the loans and securities are consistent with the size of divestment notation in the H.8. Importantly, as part of the transaction, Signature Bridge Bank, NA was placed into receivership on March 20, which is why it was then removed from the scope of the H.8. We can also follow this through the H.8 itself which shows steep declines in both total C&I and CRE lending following the agreement. The declines were in amounts consistent with Signature Bank’s loan book, excluding the $12.9 billion of C&I loans purchased by Flagstar Bank.

So, without wanting to overstate the case, or suggest that the situation at America’s small and midsize lenders is suddenly “fixed,” it appears, assuming Goldman is correct, that the headlines around bank lending published over the past two weeks might’ve been inadvertently misleading.

As Goldman’s Cahill put it, the explanation excerpted above “provid[es] a much more benign explanation for the apparent pullback.” He also suggested investors “should be cautious not to overinterpret each weekly release, and treat outliers with some skepticism.”