Yellen Warns That Banks May Cut Back On Lending

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Janet Yellen warned in a CNN interview on Sunday (April 16) that such a retreat may have an impact on the Federal Reserve’s drive to raise interest rates.

“Banks are likely to become somewhat more cautious in this environment,” Yellen told Fareed Zakaria of CNN. “We already saw some tightening of lending standards in the banking system prior to that episode, and there may be more to come.”

She suggested that this would result in credit restrictions, which “could be a substitute for further interest rate hikes that the Fed needs to make,” though she noted that she hadn’t seen anything “dramatically or significantly enough” in this area to modify her economic view.

Yellen also stated that deposit outflows have steadied as a result of the government’s move to mitigate the threat posed by the bankruptcies of Silicon Valley Bank and Signature Bank last month.

As I noted last week, a shift in lending practices “couldn’t have come at a worse time for small and medium-sized businesses (SMBs) that already struggle to access credit.”

Some of the industries most affected include business-focused hotels, as lenders are now requiring more money from hotel owners owing to fears about potential declines in occupancy rates, which may result in lower property values.

As noted in our April collaboration with Enigma, “Main Street Health Report,” a decline in lending might be especially bad news for the significant number of SMBs that rely on bank-issued loans.