'The credit crunch' is real: Tampa Bay banks are adjusting to a new funding equation

The rising interest rates have curbed the demand for loans. Now, signs indicate that banks are also pulling back as deposits become more difficult to obtain and the economy is in decline.

Fannie Mae's Chief Economist Doug Duncan, who was speaking at a panel during the 2023 Society for Advancing Business Editing and Writing Conference in St. Petersburg on last week, said that mortgage lending is where you can see it most.

Duncan explained that the sharp drop in mortgage demand in 2017 was due to the highest mortgage rates ever recorded, which rose in the fastest time frame in history.

Duncan added that 'there's also the question of terms of lending, which are not only interest rate risks, but what credit quality you bring to the table, in terms of your loan-to value, credit score, or debt-to income ratios'.

Duncan explained that as deposits leave the system some banks will not have enough money to lend and those who do, they'll have to change their lending criteria in order to take into account the new risk.

Duncan says that there is evidence of this happening.

Duncan told a reporter that he had asked the group, at a San Diego meeting two weeks earlier with 45 commercial and multifamily lenders, if credit was tighter as a consequence of the Silicon Valley Bank failure.

Duncan replied, 'Everyone raised their hands.' "As a follow-up, [I asked] if it had been tightened sustainably?" And if so, will it stay tight? About 75% of the hands rose again. At that moment, a strong sentiment was evident,' he explained.

Owen LaFave, President of the Bank of Tampa Pinellas Market, said that during the first two week of April, U.S. banks' lending dropped by $105 billion.

LaFave stated, 'Yes, the banks are pulling back.

LaFave told LaFave that he is aware of a regional Tampa Bay bank with a large presence aiming to achieve 0% growth in loans. He said that the bank was 'purely on a deposit raising mission'.

FDIC data shows that the growth of deposits at banks in Tampa Bay will finally start to slow down in mid-2022, after two years of near-record growth. According to Federal Reserve data released last week, the growth of deposits at U.S. banks has continued to decline throughout April.

LaFave stated that banks will be sitting on the sidelines for the next two quarters.

We're going into the market selectively. We won't do anything that is more transactional, where someone will not become a customer for life.

'We're a credit-based economy...inevitably, I think this has probably accelerated the possibility of a recession,' he said.