A New Perspective On Low Rates – Low Loan Demand! 1

Earnings season is upon us again. While this is not something that is typically considered to be “macro”, everything is connected, and more often than not micro and macro factors affect each other.
In the case of 2Q earnings, this is best exemplified by Wall Street banks’ struggle with loan growth. Or rather, the lack of it.
Here’s how some of them described loan growth over the course of 2021:
“In terms of overall loan growth and importantly the growth of interest-bearing balances, that’s going to be a little bit of a slough through the rest of this year,” (Emphasis ours) – Jeremy Barnum, CFO, JPMorgan
From the FT
“tepid loan demand” – Charles Scharf, CEO, Wells Fargo
From the FT
Looking at the data, we can see that the volume of loans made to businesses has indeed been falling, and continues to fall after the sharp Covid induced spike. Growth rates are also stuck in negative territory, and have been falling for slightly over a year.

From the consumer standpoint, volumes and growth rates have begun to move higher, but remain below their pre-pandemic levels.

Supposedly, this is all due to loan demand being weak. Which, at first blush, makes a lot of sense since the economy is still recovering, and a high degree of economic uncertainty still lingers.
Who would want to borrow money when they don’t have a high degree of confidence in being able to pay it back?
But, and it is a big and significant but, this perspective neglects to consider the context surrounding weak loan demand – interest rates are at historic lows.
This is well known, widely reported, and easily observable from the near zero yields throughout the US yield curve.
Here’s the Prime loan rate for US banks:

As you can see, ever since the start of the pandemic, the Prime loan rate has fallen back to its all time low of 3.25%, first reached during the Great Financial Crisis in 2008. Which means that banks are seeing weak loan demand even as interest rates sit at historic lows.
Clearly something doesn’t add up here, but what?
To be continued…
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