The Music Is About To Stop: John Toohig & Randy Woodward on Bank Lending, Deflation, and Secondary Loan Liquidity

Episode Summary

Executive Summary: Raymond James bankers Randy Woodward and John Tuhigg argue that rising rates and deposit competition are forcing banks to tighten lending, not because of classic credit deterioration but because funding costs and liquidity pressures are crushing margins. They expect slowing loan growth, weaker loan trading, and more strain in commercial real estate, auto, and subprime consumer credit, with the Fed’s next move central to whether stress stays contained or becomes a broader credit cycle.

Main Topics: Funding pressure is the real banking problem (Priority: 5/5): The speakers emphasize that banks are struggling more with rising deposit and wholesale funding costs than with immediate credit losses. Higher rates have made previously profitable loans uneconomic, especially for regional and community banks. Loan supply is tightening across major segments (Priority: 5/5): Mortgage, auto, and commercial lending volumes are slowing as banks reprice loans higher and become more selective. The issue is less about borrowers disappearing and more about banks pulling back because margins no longer work. Commercial real estate is moving into a refinance stress cycle (Priority: 5/5): CRE is described as the most vulnerable area, especially office properties and lower-quality assets. Valuations are being reset by cash flow and cap rates, forcing extensions, restructurings, or discounts. Deposit flight and balance-sheet fragility after SVB/First Republic (Priority: 4/5): The discussion uses First Republic and Silicon Valley Bank to show how fast deposits can leave and how wholesale borrowing replaces cheap core deposits, eroding net interest margins and triggering regulatory scrutiny. Fed policy and rate expectations dominate bank behavior (Priority: 4/5): Banks are making decisions based on the expectation that the Fed will cut rates soon. That belief is delaying a sharper lending pullback, but if cuts do not come, stress could deepen. Regulation, mark-to-market pressure, and CECL will amplify caution (Priority: 3/5): The hosts argue that regulators will push banks to recognize losses, hold more capital, and limit risky balance-sheet growth, which will further restrain lending and reward conservative balance-sheet management.

Key Arguments: Banks make money by borrowing cheaply and lending at higher rates; when deposits reprice from near 0% to 2%-5%+ the spread shrinks or turns negative. The current stress is primarily a funding/liquidity problem, not a 2008-style credit crisis; loan performance has not yet cracked in a broad way. Loan officers want volume, but CFOs and treasurers are now winning the internal battle because they must protect margins and liquidity. Mortgage lending is especially frozen because low-coupon loans cannot be sold without large losses and refinance demand is nearly gone. Indirect auto lending is weakening because the loans do not bring in sticky deposits, reducing the strategic value of the channel. Commercial real estate is bifurcating into 'trophies and trash'; office and weak assets face large haircuts, low liquidity, and possible restructuring. Many banks are still lending because they expect a near-term Fed pivot; if that expectation proves wrong, lending contraction should intensify. Loan growth slows when banks lose deposits or funding capacity, because even if banks can technically create deposits, they cannot do so at acceptable cost or within capital constraints. Interest-only and long-duration lending are likely to become less common because they create too much rate risk and too little current cash flow coverage. The biggest macro consequence is slower credit creation, weaker M2 growth, and potentially disinflation or deflation if lending and money supply contract enough.

Data Points: Securities book share of bank assets: about 20% - John Tuhigg said the securities book typically represents about one-fifth of a depository’s assets. Loan book share of bank assets: about 60% - Tuhigg emphasized that the loan book is the dominant asset class on bank balance sheets. Borrowing costs via Fed/wholesale facilities: about 4.5%-5% - He described current borrowing costs at the discount window, FHLB, and BTFP as expensive compared with the zero-rate era. Mortgage rates: around 6.5%-7% - Used to explain why old 3%-3.5% mortgages are deeply underwater and refis are dead. Refi eligibility in mortgage-backed securities: less than 1% in the money - Cited a research note showing almost no MBS are eligible for refinancing at current rates. Current mortgage CPR speeds: 2%-4% - Tuhigg said prepayment speeds are very low because borrowers are locked into low coupons. First Republic non-interest-bearing deposits: 72.42 / 75.21 / 69.93 - These quarterly levels were shown as examples of how core deposits eroded before the run. First Republic discount window borrowing: $63 million - Mentioned as an emergency funding source during the deposit run. Deposits leaving SVB: $42 billion in a week - Used to illustrate how quickly confidence and deposits can evaporate after a negative event. Bank deposit cost example: below 1% for some large banks - Referenced Bank of America-style sticky retail deposits that remain cheap relative to regional banks. Auto loans with large monthly payments: 15%-17% of new auto loans exceed $1,000/month - Used to show consumer stress and how high rates are affecting auto lending. Student loan restart: $300/month average - Tuhigg noted student loan payments resuming could pressure younger and lower-credit borrowers. Commercial real estate loans under review: 2020-2022 vintages - The panel discussed the large wave of CRE refinancing risk coming due over the next two years.

Pivotal Quotes: "“The loan officer has a whole lot easier time to make loans at lower rates. It’s easier to issue that loan at higher rates. It’s harder to qualify from a credit standpoint and from an origination standpoint.”" — John Tuhigg: Explaining why lending volumes are falling as rates rise and banks protect margins. "“The only thing that truly matters today is cash flow.”" — John Tuhigg: Describing how commercial real estate underwriting has shifted from loan-to-value to debt-service and property income. "“The music doesn’t have to stop. It just has to slow.”" — Randy Woodward: Summing up how even a gradual slowdown in lending and liquidity can still trigger meaningful stress.

Implications: Expect tighter credit, weaker loan growth, and more pressure on CRE and consumer borrowers unless the Fed cuts soon. Banks with sticky deposits and strong capital should fare better; others may face margin compression, regulation, and forced de-risking.