Lending to non-depository financial institutions (NDFIs) was a buzzy acronym that popped up during this month's quarterly bank earnings calls as a potential source of credit risk. The term, however, encompasses many different business sectors and borrower quality. However, since the Fed began tracking the number in the H.8 report in 2015, loans in that category shot up to $1.7 trillion this month, a 60% increase over the last year (Slide 1). Bank managers also reported healthy loan growth. Still, banks surveyed in the previous Senior Lending Officer Opinion Survey (SLOOS) report, released last August, did not report any tick-up in demand for Commercial and Industrial loans (Slide 2). The consumer remains healthy, with unemployment holding steady and the participation rate back to near historic highs (Slide 3).

While the H.8 data shows that the banking industry’s deposits at over $17 trillion are higher than they were before the Fed began to hike interest rates in March 2022, the bigger picture is that the industry is steadily losing share of household savings to the money market funds (MMFs) and TreasuryDirect.Gov where they can buy Treasurys directly through their checking accounts (Slide 4).

The voting members of the Federal Open Market Committee meet this month to decide on another 25-basis point cut in the Fed funds rate have a touch decision ahead of them, blind on much of the macro-economic data they depend on to do their jobs because of the Government shutdown, Fortunately they have other sources of information from the 12 reserve banks which help to fill in the missing data. For example, the New York Fed publishes consumer inflation expectations for 1-year and 3-year (Slide 5), which supports the thesis that inflation is falling. But then the inflation number last month pops up to 3%. The data is conflicting.

Treasury's new issuance is adding to financial stress in the system, which has caused a sharp increase in outstanding repo over the last 12 months (Slide 6). On the other hand, amid uncertainty from tariff policies and the shutdown, market indicators also support the thesis that all is well in the financial system. The Office of Financial Research's financial stress index remains well anchored at 0 (Slide 7), while the probability of a recession remains low according to the New York Fed's recession probability index (Slide 8). Credit delinquencies in household debt are higher, normalizing from ultra-low levels (Slide 9), but corporate bond default risk remains as low as it has ever been over the past 20 years (Slide 10).