U.S. Bank Loans Could Stall Significantly In 2020

Bank lending practices can be among the trickier aspects of an economy to predict, for those who aren’t experts on the specific topic. Practices can be impacted by decisions from the Department of Treasury and/or Federal Reserve, but they don’t always shift as one might expect, and to a degree they’re subject to the whims of the commercial and industrial economies. What we can do, however, is observe existing trends, and right now there are some indications that 2020 may bring about a significant stall in U.S. bank lending.

A late-2019 piece in the Financial Times pointed out that U.S. bank lending had plateaued with trade concerns crimping investment as businesses hold back. The piece specifically cited “the slowdown of the U.S. industrial economy” as a reason that fewer businesses are seeking loans. More specifically, it noted what basically amounted to a half-year slowdown in U.S. manufacturing, likely as a result of the tremendous uncertainty brought about by the U.S.-China “trade war.”

With said trade war now settled for the time being, it’s possible that some stability will return to U.S. manufacturing, resulting in gradual growth and more lending activity. However, assessments of the trade war’s conclusion cover a wide spectrum, and it’s unclear that a December trade agreement injected meaningful confidence back into the U.S. industrial economy. Furthermore, an agreement was only reached on the eve of the 2020 U.S. presidential election cycle, which brings about a whole new type of uncertainty.

The same Financial Times piece reference previously quoted JPMorgan Chase’s CFO as suggesting that the U.S. elections will “contribute to an uncertain environment.” And similarly, a more general look at the U.S. economy during election years from Smart Asset concluded that “presidential elections tend to bring surprises” - furthering the sense of uncertainty people tend to feel in such years. Altogether, it’s not an encouraging environment for an economy that’s already seen a slowdown in bank lending and business investment.

As for 2020 specifically, another factor to consider is the alternative loan opportunities some business owners are learning to take advantage of already, out of a more deeply rooted sense of uncertainty regarding banks. While such alternative methods may not apply to bigger, industry-defining companies, they are certainly coming into play for some of the newer, smaller, and younger companies - the “startup economy” - that is defining an increasingly large piece of the American economy.

One option that’s far simpler than your average bank loan, for instance, is a title loan. This is typically defined as a means of obtaining cash by way of putting up personal property - often the borrower’s car - as collateral. Again, this is not the sort of loan that interests a larger business or industry, but it absolutely makes for a popular alternative and an incentive to avoid banks for smaller startups or aspiring entrepreneurs.

These loans can also look quite different in different areas, which makes them difficult to track or monitor for purposes of assessing economic data. For example, the state of Ohio has become known to someone offering particularly favorable title loan conditions: The title loans in the city of Akron offer low, competitive interest rates and extended repayment that is largely unmatched in other states. And some of the other major urban areas in Ohio have similarly appealing title loan conditions. So, as an example, this particular state may see a significant portion of its lending activity diverted from banks to these independent lenders - whereas another state might see more of a conventional approach.

On a more nationwide level, some of the same smaller businesses that might one day have had few options aside from bank loans are also turning to various internet-based options to secure funding in uncertain economic times. In fact, these options - often referred to as peer-to-peer lending sites, where an individual or business can obtain loans from strangers - are actually becoming quite trendy. The Street profiled peer-to-peer loans as filling a need for “microlending,” which may sound small, but actually speaks to what some of these smaller businesses and startups in the U.S. are looking for. More favorable terms, less repayment pressure, and an escape from the uncertainty of big banks and credit card providers can make for an appealing trade-off for smaller loans and more incremental business growth.

The rise of these types of alternatives, combined with the economic and political calculations mentioned above, does paint an uncertain picture for U.S. bank loans for the remainder of 2020. While lending could certainly bounce back if the trade war resolution proves to be a net positive and election-year turbulence is calmer than expected, we could well see a prolonged stall.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes.