According to the latest Fed survey on main economic risks, the banking sector stress is looming large with a concern for stability in the economic and financial system.
The Washington Post reported that as the inflation eased in the last year, troubles at the middle-sized banks appeared as a major concern among business leaders, market analysts, academics, and researchers consulted by the Federal Reserves. This is especially true during the failures of SVB and Signature Bank in March. Those banks fell because of poor risk management, over-reliance on uninsured deposits, and failure to account for the risks of increasing interest rates.
The report read that despite actions by the Fed, the U.S. Department of the Treasury, the Federal Deposit Insurance Corporation, and credit quality, concerns about the economic outlook and funding liquidity can lead banks and financial institutions to contract the supply of credit to the economy. A contraction in the availability of credit will speed up the cost of funding for households and businesses. This may potentially result in a slowdown in economic activity.
The Fed’s biannual survey also cited the unsure condition tied to the rising interest rates in other countries, geopolitical tensions, and fear of the possibility of the U.S. defaulting on its debt.
The report came as the banking crisis still shakes markets and the economy. This is when the failures of SVB and Signature Bank started a financial panic. This year, the regulators seized First Republic, the 3rd bank in the USA.
Stocks at a small number of regional banks are continuing. And throughout the country, small businesses feel that the banks are pulling back on lending, which in turn is harming the ability to invest or plan for the future.
Officials at the Fed expect that growth will slow as credit conditions now tighten in ways that are like a rate hike. This makes it further tough for people and several businesses to get loans. But they do not yet know how important that pullback shall be.
On Monday, a new Federal Reserves survey on bank lending practices showed that lenders anticipate tightening loan standards further in the near future. This may include commercial real estate loans as well.
The survey further said that banks frequently cited an anticipated deterioration in credit quality. This is for their loan portfolios and in collateral values of customers, concerns about bank funding costs, a reduction in risk tolerance, bank liquidity position, and deposit outflows as reasons for anticipating to tighten the lending standards over the rest of the year 2023.
Reuters reported that credit conditions for U.S. businesses and households continued to tighten in the 1st month of the year.
Banks have reported that firms and several financial institutions, small or big, show lesser demand for credit than 3 months ago. The banks are reporting that they were capping loan sizes and raising the borrowing cost.
In the case of consumers, the banks said some demand remained for credit cards, automobiles, and other types of household credit. But, the demands were not to the degree seen at the end of the past year.