Struggling Banks Tightening Credit to U.S. Businesses
Struggling banks are tightening loans to U.S. businesses. We saw the signs in mid-June and it seems to be getting harder and harder for healthy and growing businesses to get financing. If banks continue on this path of restraining business access to capital and credit, companies cannot grow, expand and hire, putting additional strains on the economy. Many businesses are forced to delay their expansions until they can find financing. This practice by banks will contribute to keeping the jobless rate numbers high until banks loosen their lending restraints.
According to the Federal Reserve, commercial and industrial loans from banks and short-term commercial paper not backed by collateral dropped almost 3 percent over the last year, to $3.27 trillion from $3.36 trillion. This is considered the largest annual decline since the last recession of 2001 when banks started tightening credit.
The Federal Reserve also conducted a survey in April this year of senior loan officers
which reflected that 55% of American banks had tightened their lending requirements for commercial and industrial loans to small and mid-size businesses. 70% of those surveyed said they have made the loans more expensive.
With the Federal Reserve trying to keep interest rates low so that money is available to jump start economic activity, the banks are not going along with the plan by holding on to their money. Yes some tightening up was necessary as banks’ guidelines prior to the mortgage crisis may have been too loose, but now they seem to have gone too far the other direction.