The U.S. Federal Reserve’s “Beige Book,” a periodic summary of business conditions across the country, shows that it is now harder for businesses to secure loans in California, New York, and Texas, Wall Street on Parade reported.

The Federal Reserve Bank of New York said “conditions in the broad finance sector have deteriorated sharply, coinciding with recent stress in the banking sector. 

“Small to medium-size banks” in New York state, northern New Jersey, wealthy Fairfield County in Connecticut, Puerto Rico, and the Virgin Islands “reported widespread declines in loan demand.”

Lenders have tightened lending criteria and raised interest rates. Late mortgage payments among businesses and homeowners are on the increase.

Conditions are similar in the West, the San Francisco Fed noted.

“Lending activity fell significantly in recent weeks amid higher interest rates and elevated uncertainty in the banking sector,” it said. “Lending standards tightened notably and several [lenders] opted to reduce loan volumes, especially for new clients, despite reporting ample liquidity.”

Several projects, both planned and under way, were canceled by businesses unable to secure loans at affordable interest rates and that also were concerned about the overall economic future, according to the book.

Things were no better in Texas, the Dallas Fed reported.

“Loan demand continued to decline in March as bankers reported worsening business activity,” it said. “Loan volumes fell, driven largely by a sharp contraction in consumer loans.” 

“Loan performance worsened slightly overall. Credit standards and terms tightened sharply, and marked increases in [interest rates] were noted,” the bank added. 

“Banking outlooks continued to deteriorate…[banks are] expecting a contraction in loan demand and business activity and an increase in nonperforming loans over the next six months. Increased uncertainty and lack of confidence resulting from the recent banking issues were cited as concerns.”

Loans at U.S. commercial banks shrank by $300 billion from 15 March through 5 April, according to the Beige Book.

TRENDPOST: The credit crunch sparked by mid-March bank failures has begun.

With the economy already on shaky ground, banks will hold to their tighter standards and reduced loan volumes longer. 

Less money available to start or grow businesses and expand payrolls will increase the likelihood of a recession, especially as persistent inflation continues to shrink consumer spending. (See “Inflation, Consumer Spending Slowed in February,” 4 Apr 2023.)