Are interest rates now so low that banks are starting to cut back on new loans?

Signs are emerging that U.S. lenders might be pulling back, a new potential worry for the U.S. economy, according to a growing number of Wall Street analysts.

It's also a dynamic to watch for shareholders in big firms like JP Morgan Chase (JPM - Get Report) , Bank of America (BAC - Get Report) , Citigroup (C - Get Report) and Wells Fargo (WFC - Get Report) . 

Yields on 10-year U.S. Treasury bonds fell this week to about 1.5%, close to the lowest on record. Banks use the government bond yield as a benchmark for pricing loans such as 30-year fixed-rate mortgages, and with some economists now saying that a recession is looming, worries that the firms might choose to sit on their money rather than lending it out are growing.

One concern is that President Donald Trump's trade war with China continues to prompt anxiety among businesses and households about economic and market conditions.

And bank lending officers aren't immune to the disquietude: A recession or steep economic slowdown typically leads to lower business sales and widespread job cuts across the economy, two major factors that often cause borrowers to fall behind on loan payments. 

"If rates continue to decline, banks are going to start pulling back on credit, and that just becomes self-reinforcing," said Chris Wallis, CEO and chief investment officer of Vaughan Nelson Investment Management, a unit of Natixis Investment Managers, which in turn is a unit of the Paris-based financial firm Natixis.

"When you reduce their profitability, you reduce their ability to absorb losses, which means they're going to take less risk."

The Federal Reserve last month cut interest rates in a bid to stimulate the economy through lower borrowing costs. But if banks tightened up their underwriting standards or loan pricing, returns might be diminished.

The Mortgage Bankers Association reported last Wednesday that the average fixed rate on a conventional 30-year home loan rose to 3.94% in the week ended Aug. 23, from 3.9% the prior week. The increase happened even as 10-year U.S. Treasury yields slid by 0.02 percentage point.

The divergence could be an indication that banks tried to tighten their pricing on new loans to justify the risk. 

"The uncertainty created by the trade war and its impact on stock prices is likely to offset some of the positive impact of lower rates, by making both lenders and potential borrowers more cautious," Ian Shepherdson, chief economist of the forecasting firm Pantheon, wrote last week in a report.

Raymond James, the brokerage firm, cut its stock recommendation this week on Bank of America to market perform from outperform, citing the likelihood that the company's lending margins will get squeezed as interest rates drop. 

"We question banks' willingness to continue to lend at relatively thin (and declining) spreads to offset net interest margin pressure, where questions around credit metrics remain front and center," the Raymond James analysts wrote in a report.

Dick Bove, a five-decade bank analyst at the brokerage firm Odeon Capital, said many loans made years ago now might be worth selling -- since low interest rates have made investors hungry for high-yielding assets.

And if banks choke off credit, businesses would probably find it harder to finance new investments in factories, equipment and technology, and households to justify home or auto purchases.  

"A significant recession could develop if banks decide to sell the loans they own rather than make new ones," Bove wrote this week in an op-ed article on CNBC.com. "At present, the pressure to take this path is rising."

According to Federal Reserve data, U.S. banks are now sitting on paper gains on their holdings of bonds and other securities; as typically happens with fixed-income securities, falling rates lead to higher prices for the instruments.

Across all U.S. banks, the cumulative gains now total $22.4 billion. Late last year, as the Federal Reserve was raising interest rates, lenders were nursing combined paper losses on their securities of about $53 billion.

A similar pricing dynamic is likely at work with the banks' books of loans, even though that market typically is more specialized than for bonds, with a niche pool of buyers and pricing more difficult to obtain. 

Not everyone is buying the proposition, though. 

David Hendler, principal at the bank-analysis firm Viola Risk Advisors, says many banks will just do what other investors are increasingly doing these days: take more risk in search of higher returns. 

"They're going to persuade themselves to keep the volume spigots growing," Hendler said. 

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