As the dust begins to settle following the collapse of Silicon Valley Bank this month, early signs of the credit crunch that economists warned about are emerging. Even before the banking crisis, lending to households and businesses was already slowing and corporate and individual bankruptcies were on the rise.
“The Fed’s rate hikes, the ongoing issues around inflation, some challenges around worker insurance and wage pressures and the waning of a lot of stimulus — now add SVB on top of that,” said Matthew Mish, head of credit strategy at UBS Group AG. . “It seems the net result is that small and medium-sized businesses are seeing a fairly material increase in stress.”
Read more: US lending conditions tightened even before SVB failed
In Nocatee, Florida, a fast-growing suburb of Jacksonville, Matt Garvey and his wife are eager to open a new bar and grill with courts for pickleball, a paddle sport similar to tennis. They were deep in due diligence and financing arrangements when their banker gave them a word of warning after SVB failed earlier this month.
“‘Matthew, it’s not impossible, but if you’re going to do it, do it quickly because we foresee a small business credit crunch,'” Garvey recalled telling the banker.
Since then, the couple has moved quickly to get the $2.5 million loan.
That was solid advice. In the days after SVB’s collapse, Greg Schneider was talking to customers at several regional banks that began calling for “risk-based pricing”—essentially offering higher rates to riskier customers, a concept that was rarely appear a year ago.
“Banks are going to be more selective about who they lend to,” said Schneider, who is director of commercial loan analytics at Coalition Greenwich, a provider of financial data and analysis. “There was already pessimism about the general environment.”
Consumers are the engine of the economy and so far it is too early to see an impact from regional banking stress. Consumer confidence unexpectedly improved in March, according to the Conference Board’s index, which captured about a week of data after the SVB failed.
But other polls point to cracks on the horizon. Sentiment is supported in large part by a strong labor market, and a recent measure from Penta and CivicScience shows a drop in confidence in finding a new job.
“As excess savings dry up and the labor market begins to soften later this year, we suspect the credit crunch will become even more visible in spending,” Wells Fargo & Co. economists said in a note. Tim Quinlan and Shannon Seery. showed that consumers are relying on credit much more than in the past.
Customers are still spending at Mike Brey’s toy retailer Hobby Works in Maryland, but the company’s founder is worried about financing the business going forward.
Brey has been trying to renew his $250,000 working capital line at his regional bank for more than a month — a much longer delay than in previous years.
He’s not sure if the delay is related to lender issues — his banker won’t say. He has the same credit rating, assets and finances as last year. The only major difference is the SVB.
“As I go through these crises, that’s how they always start,” he said. “They say ‘it’s good. It is restrained. It’s just this industry.’ Then things just go off the rails.”
Jackson Hewitt Tax Service offers tax refund advance loans for people who need cash fast. This year, the firm saw an increase in demand with clients saying they “needed access to their tax refunds faster during a challenging economy,” according to senior vice president of marketing Kim Hudson.
The cracks have been perhaps sharpest in car lending. About one in 11 Americans who applied for a car loan in February were turned down, the highest in six years, according to a survey by the Federal Reserve Bank of New York.
Dealerships are being squeezed from all directions, said Marty McFarland, chief executive of Kinetic Advantage, an Indiana firm that helps used car dealers finance their inventory. High rates have scared off many consumers and some lenders have pulled out of the market recently.
For now, so-called “floor planning” firms that lend to merchant inventory aren’t directly hurt by SVB’s fallout, McFarland said. But he is looking even more closely at his outstanding loans lately, given the strain on the industry.
Another sign of financial stress is the increase in bankruptcy filings by small businesses and consumers this year.
Filings by smaller firms — those with less than $7.5 million in debt — rose more than 28% to 355 through March 28 compared with the same period in 2022, according to data provided by Epiq. More than 92,000 people have filed for personal bankruptcy so far this year, up 18% from a year ago, the data show.
“The growing number of households and businesses filing for bankruptcy reflects the growing economic challenges they now face,” said Amy Quackenboss, executive director at the American Bankruptcy Institute.
–With assistance from Reade Pickert and Steven Church.
More stories like this are available at bloomberg.com
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