The rise in US interest rates, echoed by tightening elsewhere in the world economy, is bad news for banking systems which:
i) show almost no sign of accelerating credit growth, and which
ii) are unlikely to be able to pass on the interest rate rises to borrowers at quite the same rate as they are obliged to raise their deposit rates.
As a result, either banks will either have to accept lower interest rate margins, or they will protect those margins by raising the risk profile of their loanbooks.
Anyone spotted a credit cycle?
Since the financial crisis, the economic recoveries seen in the US, the UK and now in the Eurozone have been long acyclical grinds, largely unsupported by any significant credit cycle. More, when we track the relatively small fluctuations in credit growth seen since then, most of the evidence suggests that the latest rise in interest rates is being made in economies where loan growth, and credit growth, is already slowing.
If one takes all the bank lending of the US, Eurozone, China and Japan and expresses the total in US dollars, by February loan growth had slowed to 3.2% yoy, with the yoy rates falling almost continuously since the middle 2016, and with the 6m momentum deflecting slightly below historic seasonal trends. Moreover, comparisons are about to turn much more difficult: if current trends are maintained, yoy loan growth is likely to stop altogether by 3Q17, turning mildly negative thereafter.