A month after liquidity shock, how’s banks’ lending business looking?

It’s been almost a month since the collapse of Silicon Valley Bank. Since then, much of the government’s response has focused on banks’ liquidity: ensuring that other banks have enough cash on hand to pay their depositors. But the turbulence also has the industry concerned about the lending side of the business. And we’re starting to see signs that banks are pulling back on making loans.

In late March, the Federal Reserve Bank of Dallas surveyed 71 banks in its district and found that volume fell for consumer loans, mortgages and commercial real estate loans.

“I do think that it is a sign of the beginning of tightening credit standards,” said Mayra Rodriguez Valladares at MRV Associates.

She said some banks are thinking twice about lending out money since deposits have been falling.

“It’s just making all banks nervous about their own liquidity, meaning their ability to meet all obligations when they come due, including depositors wanting to withdraw money,” she said.  

If lending were to dry up and people can’t get the loans they need, that’d be a disaster for the economy. But Karen Petrou at Federal Financial Analytics said that’s not what’s happening now. For one thing, falling loan volume is also a sign that people just don’t want to borrow at today’s interest rates.

“You certainly see that in mortgages, for example, where fewer and fewer people can afford to get a mortgage,” Petrou said, adding that there are still plenty of willing lenders for anyone who wants a loan. Like a big corporation, for instance.

“We’re also seeing continuing credit available, even in some of the higher-risk sectors,” she said. “The cost of borrowing is higher, but the money is there.”

Lenders aren’t only worried about the recent bank failures. Eswar Prasad at Cornell University said banks are concerned about the prospect of a recession.

“Banks are also anticipating that the months and quarters ahead are going to be a little rocky for the U.S. economy, so they’re certainly going to be much more circumspect,” he said.

Economists surveyed by the American Bankers Association said they expect banks to tighten credit standards throughout the year as the economy and credit quality get worse.