Banks were already tightening credit. But now smaller banks, where small businesses bank, are getting hit twice as hard.

Simone Del Rosario Business Correspondent

Small business could struggle to get credit as banks face record withdrawals

Apr 05, 2023

Simone Del Rosario Business Correspondent

By Simone Del Rosario (Business Correspondent), Brent Jabbour (Producer), Emma Stoltzfus (Editor)

An increasing number of banks, large and small, reported tightening credit standards to start off 2023, even before the banking turmoil that began in March. But smaller banks are now getting hit twice as hard as customers move deposits away from regional institutions, which could put some small businesses in further peril.

In the week following Silicon Valley Bank’s troubles, customers made a record number of withdrawals from smaller banks, feeling more confident that bigger banks would be a safer place for uninsured deposits after the second and third largest bank failures in U.S. history.

The latest Federal Reserve data shows between March 8 and March 15, the top 25 banks in the country gained $120.2 billion in deposits, while all of the other banks in the country lost $184.6 billion. In the week that followed, smaller banks failed to gain any of the deposits back, losing another billion by March 22.

“And you have bank management thinking, ‘Ok, how do we survive this now? Well, we probably don’t do it by lending,’” Pantheon Macroeconomics Chief Economist Ian Shepherdson said in a CNBC interview.

Banks use deposits to fund loans, so all of the banks that lost deposits are likely to tighten credit even more in the aftermath. Small and medium-sized businesses are disproportionately impacted by this. According to UBS research, smaller and regional banks hold 40% of these companies’ loans and debt.

The latest Fed survey found roughly 44% of banks reported tightening standards for business loans in the first quarter of 2023. With the exception of the COVID-19 pandemic, it’s the highest share to say that since 2009 in the wake of the Great Recession.

“Bank credit is the lifeblood of small businesses and most people work for small businesses, they drive a huge amount of economic activity and they’re really gonna struggle,” Shepherdson said.

According to Pantheon Macroeconomics research, small and medium-sized companies employ 58% of private workforce in the U.S.

SIMONE DEL ROSARIO: CREDIT TIGHTENING WAS ALREADY ON THE TABLE ACROSS THE BOARD, BUT SMALLER BANKS ARE GETTING HIT TWICE AS HARD RIGHT NOW. AND THAT’S GOING TO HAVE AN OUTSIZED IMPACT ON SMALL BUSINESS. LET ME EXPLAIN.

IN THE WEEK FOLLOWING SILICON VALLEY BANK’S TROUBLES, CUSTOMERS YANKED DEPOSITS OUT OF SMALLER BANKS AND MOVED THE MONEY INTO BIGGER BANKS, FEELING MORE CONFIDENT THE GOVERNMENT WOULDN’T LET THOSE BANKS FAIL.

AND IT WASN’T JUST A LITTLE BIT. THE LATEST FEDERAL RESERVE DATA SHOWS THE TOP 25 BANKS IN THE COUNTRY GAINED 120 BILLION IN DEPOSITS FROM MARCH 8TH TO MARCH 15TH.

WHILE ALL THE OTHER BANKS BELOW THAT LOST NEARLY 185 BILLION. THE LARGEST WEEKLY DECLINE ON RECORD.

IAN SHEPHERDSON, CHIEF ECONOMIST, PANTHEON MACROECONOMICS: And you have bank management thinking ok how do we survive this now well we probably don’t do it by lending.

SIMONE DEL ROSARIO: BANKS USE DEPOSITS TO FUND LOANS. SO NOW ALL OF THESE BANKS THAT LOST DEPOSITS – ARE GOING TO TIGHTEN CREDIT EVEN MORE. AND WHO USES THESE BANKS? SMALL AND MEDIUM-SIZED BUSINESSES. ACCORDING TO UBS – SMALLER AND REGIONAL BANKS HOLD 40% OF THESE COMPANIES’ LOANS AND DEBT.

IAN SHEPHERDSON: Bank credit is the lifeblood of small businesses and most people work for small businesses they drive a huge amount of economic activity and they’re really gonna struggle.

SIMONE DEL ROSARIO: AND IN SOME WAYS – THEY ALREADY ARE.