Tightening Credit and Small Business

By at 12 May, 2023, 3:18 pm

by Raymond J. Keating – 

On May 8, the Federal Reserve released the latest edition of its “Senior Loan Officer Opinion Survey on Bank Lending Practices.”

Regarding business loans, it was reported that standards and credit had tightened. Specifically, it was noted that “survey respondents reported, on balance, tighter standards and weaker demand for commercial and industrial (C&I) loans to large and middle-market firms as well as small firms over the first quarter. Meanwhile, banks reported tighter standards and weaker demand for all commercial real estate (CRE) loan categories.”

As for the reasons for tightening, among the issues cited were “a less favorable or more uncertain economic outlook, reduced tolerance for risk, worsening of industry-specific problems, and deterioration in their current or expected liquidity position…”

For good measure, government action or potential action was in the mix, as “significant shares of banks also cited … increased concerns about the effects of legislative changes, supervisory actions, or changes in accounting standards.”

On the demand side, it was noted: “major net shares of banks reported weaker demand for loans from firms of all sizes. Furthermore, a significant net share of banks reported a decrease in the number of inquiries from potential borrowers regarding the availability and terms of new credit lines or increases in existing lines. Greater net shares of mid-sized and other banks reported weaker demand from firms of all sizes compared with the largest banks.”

This lines us with the experiences of small business as illustrated in a new Small Business Checkup Survey conducted by Technometrica for the Small Business & Entrepreneurship Council (SBE Council). For example, 60 percent agreed that rising interest rates and 44 percent said that a “credit crunch” were negatives.

Also, 54 percent of survey respondents agreed that it was harder to secure credit than it was six months earlier.

Unfortunately, this has been an actual agenda item of the Federal Reserve – that is, to make it more difficult to borrow in a grossly misguided effort to slow the economy. The Fed mistakenly believes that this is how one fights inflation.

In reality, however, inflation ultimately is about too much money chasing too few goods, so we need more robust economic growth, coupled with reining in the money supply, to quell inflationary pressures.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His latest book is The Weekly Economist: 52 Quick Reads to Help You Think Like an Economist.


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