Good morning, 

There are signs that the banking turmoil of recent months is coming home to roost. 

The Bank of Canada Senior Loan Officer Survey showed significant tightening in some areas of lending, when it was released on Friday. 

The failure of four U.S. regional banks since March has roused fears that lenders will pull back on issuing credit, adding another headway to economies already tipping towards recession.

The American version of the loan officer survey, also out last week, showed that the share of banks tightening terms on commercial and industrial loans rose to 46 per cent in the first quarter.

These are levels typically seen in recessions and banks in the poll cited lower risk tolerance, declining economic outlook and worsening industry problems as their reasons for tightening credit, reports Bloomberg.  

“I am certainly getting vibes … in the market and in the business contacts that the credit crunch, or at least a credit squeeze, is beginning,” Chicago Fed President Austan Goolsbee told Yahoo! Finance last week. 

Business lending is not nearly so restrictive here, the Bank of Canada survey showed, but is still the tightest since the start of the COVID-19 crisis. The net balance of 11 per cent of financial institutions reporting a tightening of lending standards to businesses was up from 4 per cent in the previous quarter. 

Where Canadians are really feeling the pinch is consumer lending, especially mortgages.  

More than 35 per cent of banks tightened household mortgage lending standards in the first quarter, a higher share than at the start of the pandemic and the most in the six-year history of the household lending survey. 

“Unlike in the U.S., in Canada it appears to be households rather than businesses that are seeing the more widespread tightening of credit conditions,” said CIBC economist Andrew Grantham in a note on the data. 

Much of it is price, reflecting the steep climb in interest rates after the Bank of Canada’s aggressive hiking last year. But conditions other than price have also been tightened. 

Lack of data in the household lending survey restricts economists from making comparisons to past crises, but “current readings suggest stronger headwinds against mortgage credit growth in the near-term,” said TD Economics. 

Consumer lending, apart from mortgages, also tightened, with a net 12 per cent of banks reporting tighter conditions, also the highest since the survey started in 2017.  

Other economists warn that conditions could be tighter than they appear.

Capital Economics says focusing only on lending standards and credit spreads may give a false sense of comfort about the shape of the financial system. 

“As the level of borrowing costs has risen sharply, our calculations suggest that overall financial conditions in Canada are just as tight as during the global financial crisis,” wrote Stephen Brown, deputy chief North America economist in a note.

“That is one reason to expect the economy to struggle this year, even if recent developments such as the jump in consumer confidence seemingly reduce the risk of an outright recession.” 

* Chart by Capital Economics

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LEADING INDICATOR

Wildfires burning in Alberta rose over the weekend, fuelled by hot, dry weather. Though most oil producers which had to shut down production because of the fires have been able to bring output back on line, the cuts have strengthened the prices of Canadian heavy oil. Western Canadian Select’s discount to West Texas Intermediate, the American benchmark,  fell 25 cents to US$12.85 a barrel on Friday, the narrowest in more than a year, data compiled by Bloomberg show.

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QUOTE OF THE DAY

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MARKET SIGNALS

BREAKING TODAY

• Bank of Canada Financial System Survey — This survey will be more closely watched than usual due to the tightening of credit conditions in regional banks and commercial real estate, says RBC economist Carrie Freestone.
• The housing market will also be in the spotlight when the Canadian Real Estate Association releases its April sales figures today, along with housing start numbers from the Canada Mortgage and Housing Corp. 
• Today’s Data: Wholesale trade, Empire State Manufacturing Survey
  
• Earnings: Dorel Industries, Centerra Gold, Constellation Software, Absolute Software

PERSONAL FINANCE

Artificial intelligence and lithium mining are being hyped as the market’s next big money makers, but wealth adviser Ted Rechtshaffen says income-focused investors should consider some oft-overlooked vehicles, including high-interest savings funds and beaten down real estate investment trusts. Here are his six ways to make more income from your investments.