FAST FIVE: C&I Loans Enter The Danger Zone
The current C&I loan cycle has been more powerful and longer-lasting than the prior two cycles because the Fed has held interest rates at record low levels for a record length of time.
As the chart below shows, credit booms and bubbles form during low interest rate periods (low interest rates encourage borrowing): The US corporate debt market (which is mostly in the form of bonds instead loans) is telling a similar message as commercial and industrial loans, as I recently discussed.
I am fully aware that both C&I loans and corporate debt may reach a higher percentage of GDP in this cycle due to how low interest rates are.
When the Fed and other central banks hold interest rates at low levels, they create market distortions and encourage malinvestment or unwise lending decisions that would not otherwise occur in a normal interest rate environment.
These malinvestments are revealed once interest rates are raised and the economic cycle turns (read my piece about this in Forbes).