How To Avoid a Credit Crunch

By Colin Fahey, Vice President, Commercial Banking

As the Federal Reserve and elected officials debate the need to increase capital requirements for banks in the wake of Silicon Valley Bank and Signature Bank failures, consumers and business owners alike are left wondering what impact that may have on their ability to borrow money. Couple this uncertainty with the concern over higher interest rates and a potential recession on the horizon, and borrowers may be concerned about their current banking relationships. Will their banks be willing to lend money when its needed? Or will borrowers be caught in a credit crunch?

It's true that during an economic contraction or recession, banks often take calculated measures to protect their capital base and meet regulatory requirements. These measures, while prudent and understandable from a bank’s perspective, can be challenging for those people and businesses that rely upon their services. So, it’s important to understand how banks can react during an economic downturn and how to be prepared for such actions.

One of the most common measures taken by banks in a recession is to tighten their standards for making loans. This means banks become more cautious when it comes to lending and may require borrowers to meet stricter criteria before they are approved for a loan. This tightening often comes at the same time business owners are experiencing an increased need to borrow money as the slower economy negatively impacts their revenues and cash flow.

Along with tightening their lending standards, some banks may no longer want to lend money to businesses in industries seen as having too much risk. Reducing their risk profile in this manner allows banks to conserve capital; however, the impact on people and business in the community could be significant. It can be challenging for borrowers to be in the business or in the industry a bank is looking to exit, especially in a difficult economy.

How can a borrower guard against getting caught in a credit crunch?

  • Establish a banking relationship before you need to borrow money.
  • Select a bank with a reputation for putting clients first.
  • Select a bank with a strong capital base and ample liquidity and a history of profitability.
  • Meet frequently with your banker and other decision makers.
  • Make sure your banker is experienced and understands your business cycles.
Banks play a crucial role in maintaining a healthy economic environment. However, in times of stress, they may take restrictive measures to maintain their financial health. Those measures could be to the detriment of the communities they serve. As such, it is vital for people and businesses to know their banker and their bank and establish a relationship of trust. Being confident in your bank and their support for you and your business is vital for success. Ask questions and get to know your bank. A strong partnership with your bank can help all parties navigate choppy economic waters.

Interested in a banking relationship that works for you? Contact The National Bank of Indianapolis where clients receive outstanding personal service, at a fair price, delivered by experienced local decision makers.