Pay Attention to Lending at Small Banks. It’s Sending a Message.

A surge in bond yields has hit the stock market, but the factors behind that move are hitting banking as well.

Expectations that interest rates will stay higher for longer can be blamed for the market moves. This same concern has affected bank lending. Rates on auto loans, for example, are higher, while the cost of providing those loans has risen as well. Commercial and industrial loans outstanding, a measure of the amount borrowed for business purposes across the nation, have been declining since the bank failures in March. They now sit at the lowest level since September 2022. Bank credit, or loan balances, at lenders across the nation have been declining since mid July.

Survey respondents—CEOs or senior loan officers at 71 financial institutions—said commercial clients are pulling back due to increased uncertainty and to focus on costs and efficiency. The burden of paying interest is reducing the free cash flow available for investment, one respondent said.

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