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April 4, 2020, 11:20 a.m. EDT

American businesses are tapping their credit lines at the fastest pace ever

Banks made loans when the economy was good. What happens if their customers can’t pay them back?

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By Andrea Riquier

As business activity jerked to a halt in March, American companies began using the credit lines they took out from banks to stay afloat.

The chart above shows the week-over-week changes in usage of what’s known as “commercial and industrial loans,” and as BCA Research analysts commented in a Tuesday note, that metric hit its highest level ever last week.

“Normally, rising business credit line usage would prove to be a boon for bank earnings,” BCA analysts noted. But these are unprecedented times, they added: “The clear risk for banks is that firms drawing on these lines may soon be insolvent.”

It’s worth pointing out that it’s not just the social distancing mandated by the coronavirus epidemic that will weigh on banks. The collapse in oil prices early in March would have been enough to raise the frequency of defaults and, likely, outright bankruptcies.

See: Here’s a breakdown of U.S. bank exposure to the energy industry as oil prices tank

Still, as BCA analysts note, “the recent fiscal package provides some measure of optimism.” They reckon that about $377 billion of the bill’s spending will go to helping small businesses, which will in turn help banks.

“Our sense is that policymakers will do more if banks start facing even higher losses,” the analysts wrote, adding, “Stay tuned.”

An exchange-traded fund that tracks bank stocks /zigman2/quotes/202716924/composite KBWB +8.64%   has lost nearly half its value in the year to date, about double the loss sustained by the broader stock market. /zigman2/quotes/210599714/realtime SPX +1.23%  

See: ‘We are giving up on energy,’ say Jefferies analysts, who compare the beaten-down sector to the ’62 Mets

/zigman2/quotes/202716924/composite
US : U.S.: Nasdaq
$ 38.08
+3.03 +8.64%
Volume: 3.01M
May 26, 2020 4:00p
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/zigman2/quotes/210599714/realtime
US : S&P US
2,991.77
+36.32 +1.23%
Volume: 3.36B
May 26, 2020 5:20p
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Andrea Riquier reports on housing and banking from MarketWatch's New York newsroom. Follow her on Twitter @ARiquier.

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