Just when the smaller companies that are key to economic growth need banks’ help the most, traditional lenders are, once again, turning away.
Even if central banks pull off the seemingly impossible and curb demand sufficiently to bring inflation back to target without crushing economies, creditors still expect business failures to rise, especially among smaller companies.
In mid-January, the International Association of Credit Portfolio Managers (IACPM) released its most recent survey of banks, insurance companies and private credit funds. An overwhelming majority predict higher default rates and widening credit spreads in every region and every type of credit, with the possible exception of US high grade.
The European Central Bank (ECB) January 2023 eurozone bank lending survey found the sharpest tightening in credit standards since the sovereign debt crisis of 2011 for loans to small and medium-sized enterprises (SMEs) and large businesses.
Banks, whose risk tolerance declines as their own funding costs go up, expect this tightening to continue through the first quarter, with more lenders seeing the impact hitting SMEs than large corporates.
In January, the Bank of England (BoE) reported a decreasing supply of credit to medium-sized firms, with this trend expected to spread to all corporates in the first quarter, with default rates picking up for small businesses.
