After Silicon Valley Bank and two other institutions failed, banks made it harder for people and businesses to get loans, which signalled a worsening prognosis for the American economy, according to a Federal Reserve poll.
According to the Fed’s Senior Loan Officer Opinion Survey, 42% of banks said they slightly tightened lending conditions for large and midsize businesses over the past three months. And 45% indicated they slightly tightened the lending standards for small businesses.
Due to the economy’s growing unpredictability and the Fed’s aggressive interest rate hikes, a similar percentage of banks were already making it harder for people and businesses to borrow money during the previous three months.
In the most recent survey, banks reiterated their worries about the economy and a decreased willingness to take risks, although more small and midsize banks mentioned concerns about deposit withdrawals from consumers, liquidity issues, and funding costs.
According to the report, banks tightened their lending criteria for credit card, auto, and consumer loans. Due to the substantial inflation experienced by low- and middle-income households, credit card balances have reached a record high and the default rate has risen somewhat.
The banks also stated that they anticipated tightening their lending standards for all sorts of loans during the remainder of the year.
According to the report, both families and businesses are now less likely to request loans. Customers’ willingness to take on debt to pay for homes and cars has declined as a result of the Fed’s 14-month steep increase in interest rates, which has driven up borrowing prices.
Silicon Valley Bank and Signature Bank both failed in March as a result of clients withdrawing money out of concern for the banks’ sustainability in the face of substantial investment losses. Because of the Fed’s substantial increase in interest rates over the previous 14 months, the value of their Treasury bond holdings had fallen.
The announcement that the Fed, Treasury Department, and Federal Deposit Insurance Corp. would make sure depositors could get their money even if their accounts exceeded the FDIC’s $250,000 insurance limit helped to calm the fear.
In an effort to contain a historic inflation spike, the Fed raised its benchmark interest rate by a quarter percentage point last week, bringing the total number of rate increases since 1975 to 40. However, the Fed said it could now take a break because the banking crisis was likely to slow economic growth and inflation, giving the Fed less work to perform.
Fed Chair Jerome Powell stated at a news conference that “in theory, we won’t have to raise the rate quite as high as we would have had this not occurred.”