Yellen Warns Banks Could Pull Back on Lending

America’s treasury secretary is warning of a tougher lending environment following two recent bank failures.

In a Sunday (April 16) CNN interview, Janet Yellen said that such a pull back could affect the Federal Reserve campaign to raise interest rates.

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

She argued that would lead to a restriction in credit that “could be a substitute for further interest rate hikes that the Fed needs to make,” though she added she hadn’t seen anything “dramatic enough or significant enough” in this area to change her economic outlook.

Yellen also said that deposit outflows had stabilized following the government’s move to contain the threat of last month’s twin collapses of Silicon Valley Bank and Signature Bank.

As PYMNTS wrote last week, a change in lending habits “couldn’t come at a worse time for small and medium-sized businesses (SMBs) already struggle to access credit.”

Some of the industries specifically affected include business-focused hotels, as lenders are now seeking more capital from hotel owners due to concerns about future drops in occupancy rates that may lead to reduced property values.

A contraction in lending could be especially bad news for the substantial portion of SMBs that depend on bank-issued loans, as discussed in PYMNTS’ April collaboration with Enigma, “Main Street Health Report.”

Of Main Street SMBs surveyed, more than 25% said they rely on bank-issued working capital or business loans to help manage any cash flow shortages. Another 18% rely on personal loans from a bank, which are now also at risk as banks begin to reconsider their lending strategies.

To make matters worse, the study also found that three-quarters of Main Street businesses report they would run out of cash within 60 days. Just 26% of SMBs that have brick-and-mortar shops in commercial sectors say they have access to enough funding to remain open beyond two months in the event of a cash flow shortfall.

The study also found that close to 60% of Main Street businesses believe the country will sink into a recession in the next year and that there is a large and so far unmet need for financing options to help protect against potential cash shortfalls.

Yellen’s warning came two days after the J.P. Morgan Chase spoke of potential “storm clouds,” even as the country’s biggest bank reported continued consumer spending.

During an earnings report last week, J.P. Morgan CEO Jamie Dimon said that although the economy is on “healthy footings” and consumers have robust balance sheets, “the storm clouds that we have been monitoring for the past year remain on the horizon, and the banking industry turmoil adds to these risks.”