Title: The Impact of US Bank Lending Standards on Small Businesses and the Economy
Introduction:
The tightening of credit standards in the US banking industry is having profound effects on small businesses and the economy at large. US domestic banks have reported a widespread tightening of credit standards at the end of the first quarter of 2023, before the full impact of the regional banking crisis was felt. This article explores the effects of tighter lending criteria on small businesses and households. This tightening is likely to reduce the flow of credit, amplifying the impact of interest rate hikes by the Federal Reserve, affecting much of the US economy.
Effects of Tightened Lending Criteria on Small Businesses:
The net percentage of national banks tightening standards for commercial and industrial (C&I) lending to small businesses with annual sales below $50 million, reached +47% at the end of the first quarter. This has significantly impacted small businesses with many unable to access credit to grow their ventures.
The net percentage of tightening of C&I standards for small businesses has risen to levels usually associated with a recession. Small businesses are the backbone of the US economy, and if they are starved of credit, it is likely that they will be unable to sustain their businesses, leading to increased defaults.
Effects of Tightened Lending Criteria on Households:
On the household side, the net percentage tightening of standards had risen to +30% for both consumer credit card and auto loans, while still somewhat below previous recession levels. This tightening of lending criteria makes it difficult for households with limited financial resources to access credit. As a result of the rising cost of credit and the restricted availability of credit, the slowdown in spending by households will act as another drag on the economy.
Anticipation of a Slowdown in the Business Cycle and a Rise in Unemployment:
Banks are likely anticipating a slowdown in the business cycle and rising unemployment from 2022, causing an increase in defaults. However, this tightening of the credit cycle is somewhat self-fulfilling, making a slowdown in the business cycle and rising unemployment more likely.
The Role of Central Banks:
The restrictions in lending criteria are doing part of the job for the central bank by restricting the volume of new lending and spending. The small businesses and marginal households are some of the most sensitive to any changes in the cost and availability of credit as they have limited financial resources of their own. The central bank is likely to continue regulating lending and financing as a necessary measure to control credit expansion and economic conditions.
Impact on the Economy:
The tightening of lending criteria is significantly affecting the economy since it contributes to a decline in spending by small businesses and households. The impact of this shift is a slowdown in the economy since it ultimately reduces credit expansion. As a result of the recessionary environment that follows, many businesses struggle to survive, leading to a decline in employment and a slowing of economic growth.
What the Future Holds:
The effects of the current tightening of lending standards will endure well into the future, with the likelihood of restrictions on credit expansion occurring even in times of economic growth. The long-term impact on small businesses and households is enormous as they continue to experience hardships related to access to credit expansion.
Summary:
The US banking industry has tightened its lending criteria, limiting the flow of credit to small businesses and households, which has amplified the impact of interest rate hikes by the Federal Reserve over the past year. This tightening of lending criteria has led to a decline in spending by small businesses and households, which has significantly affected the economy.
Banks are anticipating a slowdown in the business cycle and rising unemployment that will result in increased defaults, and as a result, they are tightening their lending criteria. The restrictions are doing part of the job for the central bank by restricting the volume of new lending and spending. However, this tightening of the credit cycle is somewhat self-fulfilling, making a slowdown in the business cycle and rising unemployment more likely.
Small businesses and households are some of the most sensitive to any changes in the cost and availability of credit since they have limited financial resources of their own. Central banks will continue regulating lending and financing as a necessary measure to control credit expansion and economic conditions.
The effects of the current tightening of lending standards will endure well into the future, and restrictions on credit expansion may occur, even in times of economic growth. The long-term impact on small businesses and households is enormous, as they continue to experience hardships related to access to credit expansion. It is essential to find ways to address the limitations in access to financial resources to support a resilient and sustainable economy.
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US domestic banks reported a widespread tightening of credit standards at the end of the first quarter of 2023, even before the full impact of the regional banking crisis was felt.
Tighter lending criteria are likely to reduce the flow of credit to small businesses and households, amplifying the impact of interest rate hikes by the Federal Reserve over the past year. The net percentage of national banks tightening standards for commercial and industrial (C&I) lending to small businesses with annual sales below $50 million reached +47% at the end of the first quarter.
The net percentage of tightening of C&I standards for small businesses has risen to levels usually associated with a recession, according to previous results from the Bank Lending Practices Opinion Survey (SLOOS) of senior loans. The results are based on responses from 65 national banks to the quarterly survey, sent by the central bank on March 27 and returned on April 7.
Chartbook: US Bank Lending Standards On the household side, the net percentage tightening of standards had risen to +30% for both consumer credit card and auto loans, much more than a year ago, although still somewhat below previous recession levels.
Banks are likely anticipating a slowdown in the business cycle and a rise in unemployment, widely expected from the end of 2022, which will increase defaults. But the tightening of the credit cycle is somewhat self-fulfilling, making a slowdown in the business cycle and rising unemployment more likely.
In effect, the tougher rules are doing part of the job for the central bank by restricting the volume of new lending and spending. Small businesses and marginal households are some of the most sensitive to any changes in the cost and availability of credit because they often have fewer borrowing options and limited financial resources of their own.
As the price of credit rises and its availability becomes more restricted, the slowdown in spending by small businesses and households will act as another drag on the economy. Related columns:
– Cromwell’s rule and the global economic outlook (May 10, 2023) – Recession or not, the US economy is losing momentum (May 5, 2023)
– The hard landing is here for US manufacturers (April 4, 2023) John Kemp is a Reuters market analyst. Opinions expressed are her own (Editing by Sharon Singleton)
(This story has not been edited by Devdiscourse staff and is automatically generated from a syndicated feed.)
https://www.devdiscourse.com/article/business/2471375-column-us-banks-tighten-lending-standards-to-small-business-and-consumers-kemp?amp
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