Carissa Rodeheaver, CEO of First United Bank & Trust in Maryland, began reevaluating her bank's strategy last year due to Federal Reserve interest rate hikes and an uncertain economic environment. The bank shifted its focus from commercial real estate lending and tightened its loan collateral evaluations, resulting in a modest $9.6 million increase in lending during Q1 2023.
Credit Shock Avoided Despite Bank Failures
The dramatic collapses of Silicon Valley Bank, Signature Bank, and First Republic Bank, combined with aggressive rate hikes, have not resulted in the worst credit shock. First United's experience suggests that the U.S. central bank has managed to avoid a disastrous credit crash, as lending still increased, albeit slightly.
Economy Slows in Response to Tighter Credit Conditions
Fed officials maintain that the banking system is not facing a broad crisis. Making credit less available and more expensive should reduce consumer and business spending and lower inflation. Fed Governor Philip Jefferson noted that the economy has begun slowing "orderly" in response to higher interest rates.
Fed Policy Rate Impact on Inflation Control Debated
The Fed's recent policy rate increase to 5.00%-5.25% has sparked debates about its adequacy for controlling inflation. Policymakers are considering whether further rate hikes might be necessary or if the banking sector will crack down on lending to the point of causing a recession.
Data Indicates Less Severe Outcomes
Recent data and survey responses show that the credit shock's impact is less severe than initially anticipated. Bank lending dipped after SVB's collapse but has since rebounded, recouping about a third of the decline. The Fed's Senior Loan Officer Opinion Survey revealed that only a slightly larger share of banks tightened standards for key business loans. The financial stability report found little evidence of a broad crisis developing.