A survey released on May 8, 2023 reports that the criteria for taking commercial and industrial loans have been tightened, leading to difficulties faced by banks. Common public is also getting troubled due to higher costs of mortgages and home equity loans. This result outlined in the Bank Loan Officer Survey indicates economic slowdown, causing further job cuts in the US economy.
The survey, also known as SLOOS, highlighted the fact that due to the ongoing economic crisis, 46% of the total banks have increased strictness in terms of approving loans for corporate purposes in the previous quarter. These conditions are even more firmer for small companies and startups, where 46.7% of banks have agreed to tightening of loan requirements.
The recession will be carried forward in 2024, causing changes in risk tolerance, consumer and corporate demands for loan, lending conditions and requirements, fall in deposit outflows – an overall negative expectation about the economy. Due to reduced business loans, credit supply and funding, companies would cut back on expenditures by laying off several employees and reducing vacancies.
The Fed, however, has a justification for this move. Due to job cuts, people will save more of their accumulated income and reduce expenditure on goods and services. Thus, reduced consumer demand will lead to a fall in the inflation rate, that is already high in the US economy. The central bank also announced a rise in the interest rate in order to fight the inflationary crisis. However, it will only cause more financial burden for both the consumers and the producers.
Consumers will not spend much on various items as higher rates will cause higher prices, leading to a fall in demand. Again, due to the additional cost, companies will cut jobs and reduce labour demand. Thus, the cycle of contractionary monetary policies, economic slowdown and job cuts will continue.
Nick Gerli, a management consultant focused on real estate and lending, has written a thread of tweets confirming what we just discussed – According to Bank Loan Officer Survey, slowdown will raise layoffs.
Therefore, as we have seen, Bank Loan Officer Survey indicates economic slowdown, severely affecting the US banking sector. Already the collapse of Silicon Valley Bank, Signature Bank and Silvergate Bank; takeover of First Republic bank and Credit Suisse have caused significant layoffs in numerous American banks and their branches all over the world.
Moreover, such rise in unemployment is disastrous for small and regional banks, as speculations are going on about a fall in their share prices. As a result, investors are already prepared for the loss by selling short their securities.
Source: Bank Loan Officer Survey