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- Economists expect growth to slow in the US over the next couple of years.
- The yield curve partially inverted this month, an occurrence seen as a potential recession predictor.
- Meanwhile, banks have started to pull back on risky lending, Reuters reports.
With fears about the next economic downturn looming, banks are taking a step back from risky lending.
Reuters first reported that Capital One Financial Corp is among banks restricting how much they lend, holding back on initial loans and credit-line increases. Regional banks also appear to be erring on the side of caution, particularly with second mortgages, commercial real estate loans, and credit cards.
According to a survey out this month from the Federal Reserve Bank of New York, nearly half of applicants with low credit scores were rejected in the four months ending in October. The credit rejection rate was 21.2% that month, well above its reading of 15.7% at the same time a year earlier.
And banks shut down the highest number of existing accounts since the beginning of the survey in 2013, with most of the closings among subprime customers.
“Rates have risen over the past year so I’m not surprised to see banks pulling back from riskier loans; that’s what they’re supposed to do,” said Ian Sheperdson, chief economist at Pantheon Macroeconomics. “Higher interest rates mean higher default rates, other things equal.”
As trade tensions linger, stimulus fades, and monetary policy tightens, economists widely expect growth to slow next year.
The yield curve partially inverted earlier this month, with the shorter-dated 3-year Treasury yield topping its 5-year counterpart. That marked the first time it had happened in 11 years, and it awakened fears of an imminent slowdown.
If the Federal Reserve increases its benchmark interest rate by a quarter percentage point this week, as is widely expected, that narrowing would likely continue.
Bank stocks have tumbled in recent months, with the S&P 500 financials index briefly falling more than a fifth from its January peak. For financial institutions borrowing at a low short-term rate and lending at higher long-term rates, a flattening yield curve can also threaten profitability.
More than half of economists surveyed by the Wall Street Journal forecast a recession could start in 2020. Still, just one in 10 respondents expect a recession next year.
John Stoltzfus, chief investment officer at Oppenheimer Research, said fundamentals this year have shown enough strength to weather some slowing domestically and abroad.
“Yet recession predictions continue to litter the economic landscape even as fundamentals don’t appear to show deterioration or signs that a recession is imminent,” he said.