The early 2023 bank failures pushed many lenders to reevaluate their lending policies and now many businesses
Question:
The early 2023 bank failures pushed many lenders to reevaluate their lending policies and now many businesses are finding it more difficult to obtain loans. However, the changing policies do not reflect the state of the economy given that recent economic activity has not changed much in the past couple of months according to data compiled by the Federal Reserve. The primary exception is that "lending volumes and loan demand" did fall over the same period of time.
The Fed's Beige Book reported the data and attributed the decline in lending to tighter lending standards driven by banks' concerns over liquidity and overall economic uncertainty. Many drivers of economic growth, such as consumer spending and construction activity, were stable or down slightly with tourism reporting an uptick in business activity. The economic data do not seem to support the banks' lending policy changes but businesses will still have to navigate the new reality and find access to funds to maintain operations.
https://www.cnn.com/2023/04/19/economy/spring-beige-book/index.html?utm_source=business_ribbon
Thinking Critically Questions:
- Why did banks tighten lending policies?
- Do you think it is a good practice under current economic conditions? Why or why not?
- How will the change in lending policy affect business operations of banks and borrowing firms?
- Why do some firms use long-term financing for working capital needs?
- What are potential benefits and risks from those firms' financing policy? How those will affect firms' cash flows defined under lecture note 1-3?