You can take a horse to water, but you can’t make it drink.  This is generally the mistake made by many when it comes to credit.  If you expand the availability of credit, and make it more attractive, then more people will want credit.  But this is rarely the case.  In fact, demand for credit tends to lead its supply (by about 6 months).  This can be seen in the next chart.  It is pointless to mention C&I loans are still growing strongly, when the demand for loans is falling, as it is today.

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Source: Bloomberg and Variant Perception

There are more signs the credit cycle is maturing.  Charge-off rates and delinquencies generally lag the credit cycle, and are one of the last things to turn higher, well after the credit market has experienced significant volatility.  Our VP Stress Index, which looks at a diffusion of worsening leading and coincident economic data and credit spreads, is now the highest it’s been since the last recession (next chart).  We thus expect to see charge-off rates climb higher from their rock-bottom levels over the next 12 months.

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Source: Bloomberg and Variant Perception