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What’s going on:    Â
The Federal Reserve reported that banks have imposed stricter lending standards and there is a continuing low demand for loans in Q2. This is a trend that precedes recent banking sector stresses, according to Bloomberg. The proportion of U.S. banks with tougher terms on commercial and industrial loans for medium and large businesses has risen from 46% in Q1 to 50.8%. Â
There are expert concerns about the collapse of four regional banks since March and the impact that will have on the financial sector — particularly on the access to credit that could potentially push the U.S. economy towards a recession. Despite some optimistic indications of a resilient economy, banks are predicting further tightening of all types of loan standards due to future economic uncertainty and expected deterioration in the quality of loans and collateral values.Â
Why it matters:Â Â Â Â
Tighter loan standards and lower demand for credit could slow economic growth as businesses will likely face challenges in securing capital for expansion, innovation, and operational costs. If this trend persists, it could slow economic recovery and impact job creation. There is also an increase in specific concerns for the commercial real estate industry, due to struggles faced by office-building owners following the rise of remote work and higher interest rates. Tighter loan standards have the potential to negatively impact commercial real estate loans, impacting commercial real estate in numerous metro areas throughout the U.S.Â
How it’ll impact the future:Â Â Â Â
Tightened lending standards and less access to credit could slow business growth and innovation, leading to fewer job opportunities and potentially higher unemployment rates. The reduced demand for commercial real estate due to remote work could lead to restructuring in the property market and perhaps even changes within city planning (if the trends last long enough). The current post-pandemic economic situation may push businesses to adopt more nimble operational strategies, such as hybrid or remote work. An increasing number of newer businesses might also start seeking alternative funding sources.Â
