Low volatility is a good indicator of reduced lending risk. This is very evident when you look at the CBOE Volatility Index (VIX). During the global financial crises of 2008-2009, the Volatility Index peaked to historical highs to reflect the increased credit risk in the market and the risk of investing in capital assets overall.
Similar spikes can be seen in 2011-2012, which also marks the period when the Eurozone crisis was at peak levels thereby creating fears of a recurrence of the 2008/2009 crisis. The same happened in 2015, which was also characterized by the collapse of oil prices and the EUR/CHF forex flash crash.Â
However, a lot has changed since then with the CBOE Volatility Index now at the lowest levels in history. The current price per share of the CBOE Volatility Index is pegged at just under $10 and recently traded well below $9.50. Consequently, stock prices have been rallying to reflect the economic confidence levels depicted by the VIX, with the S&P 500 Index (SPX), the NASDAQ Composite and the Dow, all hitting historical highs.
And in response to the low volatility, creditors have increased their lending to businesses while consumer loans are yet to catch up. This could be partly because creditors are not completely convinced by the low volatility levels and are being extra cautious when lending to individuals. Consumers have also exhibited signs of restraint when it comes to borrowing while top credit repair agencies continue to caution against the unnecessary use of credit.
This is probably the reason why the U.S. consumer credit has been on a downward trend since the turn of the year. On the contrary, business lending increased during the first quarter of 2017 and is predicted to continue this trend in the foreseeable future. According to a report published by the WSJ, business lending by U.S. banks grew by 8.5% in the first three months of the calendar year and is now on track to overtake residential mortgages.
