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Banks Are Becoming Increasingly Risk-Averse, Impacting Business and Consumer Borrowing

Banks are a cornerstone of the American financial system, often acting as the backbone for businesses in need of a business line of credit or small companies seeking small business loans. However, recent trends show that banks are becoming increasingly selective about to whom they extend credit. In a climate where businesses are already battling issues like bad credit and broken invoicing systems, the hesitancy from banks is adding another layer of complexity.

According to the latest statistics from the Federal Reserve, the annualized, seasonally adjusted growth rate of overall loans at U.S. banks has been a mere 3.6% in Q3, notably below the long-term average of 7%. Analysts like Brian Foran of Autonomous Research attribute this sluggishness in part to rising interest rates, which have made everything from home mortgages to business loans more expensive. With many industries also exhibiting credit caution, such as the commercial real estate sector, the picture looks bleak for both consumers and businesses.

The Ripple Effects of Rising Costs and Regulations

Rising deposit costs are forcing banks to reconsider their lending practices. Rather than extending unsecured or short-term business loans freely, they are focusing on maintaining the stability of their deposit base. This is crucial not only for keeping regulators happy but also for ensuring that investors remain confident in the viability of the banking system. High capital requirements enforced by new Federal Reserve proposals are further putting a damper on bank lending.

The concept of banks being on a “diet” has come to the forefront, meaning they are more selective in their risk assessments. This is causing a shift away from indirect lending—like those via outside mortgage originators or vehicle sellers—towards more secure, “full relationship” loans. Bank of America, for instance, is evaluating how much unused credit-card lines they can offer based on the required higher capital levels.

The Big Tech Influence

As Silicon Valley Bank and First Republic bank runs are still fresh in memory, the role of big tech in financial services can’t be overlooked. S&P 500 banks are currently priced at 8.7 times forecast earnings for the next 12 months, compared to a 10-year average of above 11 times. While banks are struggling with risk management, big tech firms like Apple and Google are exploring options to offer financial services. These technology companies have the advantage of massive consumer data but lack the regulatory scrutiny that banks have, creating a sort of imbalance in the sector.

The Problem of Selectivity

The challenge, however, is that this selectivity might be too restrictive. Jamie Dimon, CEO of JPMorgan Chase, warned that the new set of capital proposals by the Fed suggests that “almost all loans are bad,” signifying a broader issue in the lending sector. If banks are increasingly wary about extending credit lines, this impacts businesses’ ability to grow, as traditional avenues for financing, such as factoring or tapping into business lines of credit, become less accessible.


The overly cautious stance of banks on lending may be prudent from a risk-management perspective, but it’s hampering economic growth. As avenues for financing like business lines of credit or small business loans become increasingly restricted, businesses—especially small companies—struggle to find the capital they need. In an era where bad credit and broken invoicing systems are already obstacles, this new challenge is one that can’t be ignored. It’s clear that a balanced approach to lending is needed, one that allows for growth while keeping risk in check.

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