Sarah Puil needs to purchase between $500,000 and $1 million worth of premium wines and other inventory by the end of the year to make the specialty blends that her company will sell and ship to customers across the country. But after the collapse of Silicon Valley Bank set off a chain reaction that dried up many types of funding, it’s unsure where to get the money.
Boxt, their three-year supplier of upscale boxed wine, is in a vulnerable phase where access to credit is critical to its growth and ability to continue producing its red, white and rosé wines.
As banks and other investors pull out due to the turmoil, Ms Puil and other entrepreneurs are finding borrowing and raising money more difficult and expensive.
“That’s all we’re talking about,” she said. The demise of the bank, a major lender to the technology and wine industries, “accelerated the tightening of venture capital — that’s the big deal,” she said.
Boxt’s concerns provide an indication of the economic fallout borrowers across the country are facing as credit becomes increasingly difficult to obtain. It is too early to say how much the banking crisis could slow down the economy, but early signs point to heightened caution on the part of banks and investors.
Taking out large mortgages is becoming increasingly difficult, industry experts report. The commercial real estate industry is bracing for trouble as the mid-sized banks that serve it become more cautious and less willing to lend. Used car loans are more expensive. And a recent survey by the Federal Reserve Bank of Dallas found that a sizeable proportion of banks in the region are reporting tighter lending standards.
The question now is whether banks and other lenders will pull back enough to plunge the US economy into a deep recession. Pending the release of full data — a Federal Reserve survey of loan officers across the country is slated for early May — economists are analyzing histories of small businesses, mortgage originators and homebuilders to get a sense of the extent of the disruption. Interviews with more than a dozen experts from different industries indicated that the effects are beginning to take hold and could intensify.
“People are using the ‘c’ words for the first time in a while: credit crunch,” said Anirban Basu, chief economist at Associated Builders and Contractors, a trade association. “What I’m hearing — and what I’m starting to hear from contractors — is that credit ratings are starting to tighten.”
The collapse of Silicon Valley Bank on March 10 sent shockwaves through the banking world: Signature Bank went bust on March 12, First Republic needed a $30 billion cash injection from other banks on March 16, and Europe became Credit Suisse sold to its main competitor in a hastily brokered deal on March 19.
The situation appears to have stabilized, but depositors have continued to withdraw cash from bank accounts and invest it in money market funds and other investments. Early Fed data on the banking system, released each Friday, suggests that both commercial and industrial lending and home lending fell sharply through late March.
When banks lose deposits, they lose a source of cheap funding. This can make them less willing and able to lend. The risk of future turbulence can also make banks more cautious.
As credit becomes harder and more expensive, fewer businesses expand, more projects fail, and the hiring rate falls, the foundation is laid for a broader economic slowdown.
Because of this, Fed officials believe the recent upheaval will do at least some damage to the economy, although no one is sure how much.
Any slowdown will exacerbate conditions that have already become tougher for borrowers. The Fed has raised interest rates over the past year, making borrowing more expensive, and jobs data released on Friday provided the latest evidence that demand is slowing enough to cool the economy, weighing on hiring and wage growth.
Still, many Fed officials had gone into March expecting they could hike rates a few more times in 2023 until inflation is brought under control. Now the banking consequences could slow down the economy enough to make further steps less urgent or even unnecessary.
“It is too early to determine the magnitude of this impact, and therefore too early to tell how monetary policy should respond,” Fed Chair Jerome H. Powell said at a news conference last month.
Aftershocks are already appearing. Commercial real estate borrowers rely heavily on mid-sized regional banks, which have been particularly hard hit by the turmoil. Those banks have already become choosier when interest rates rise a bit, said Stephen Buschbom, research director at Trepp, a commercial real estate research firm. Anecdotally, the Silicon Valley Bank explosion makes things worse.
“The bottom line is that it’s not easy to get a loan approval,” said Mr. Buschbom.
Tougher lending could squeeze an already suffering sector: Office properties have struggled with the pandemic as many city workers have shunned their desks. Mr Buschbom says he believes many borrowers will struggle to renew their loans, forcing some to do so-called special services, where they pay interest but no principal debt. And as the industry struggles, it could exacerbate the pain for mid-sized banks.
The troubles could mean less business for contractors like Brett McMahon, general manager of concrete construction firm Miller & Long in Bethesda, MD.
“I don’t think it was 2008, 2009 — that was such an exceptionally heavy event,” Mr. McMahon said. But he believes the bank explosions will exacerbate the credit crunch. He is cautious and tries to snatch more time from the aging machines. He expects to stop hiring by the end of the year.
“Most contractors will tell you that 2023 looks decent,” he said. “But 2024: Who the hell knows?”
In the residential real estate market, jumbo loans – in excess of around $700,000 or $1 million depending on the market – were already getting more expensive. Now, Michael Fratantoni, the Mortgage Bankers Association’s chief economist, has heard from bankers that deposit outflows after Silicon Valley Bank’s demise mean banks have less leeway to make and hold such loans.
Ali Mafi, a Redfin real estate agent, has noticed that major banks are tightening their standards for borrowers in San Francisco. It’s not like the 2008 financial crisis, but in recent weeks they’ve started asking potential borrowers to hold the mortgage payments in their bank accounts for a few more months.
Still, he hopes the fallout won’t be extreme: Some mortgage rates have fallen as investors anticipate less rate action from the Fed, which is combined with higher stock prices and a drop in local house prices to counter some of the banking woes.
Auto loan interest rates rose sharply according to March loan application data analyzed by Cox Automotive. Borrowing costs for used cars rose more than three-quarters of a percentage point in a month, said Jonathan Smoke, Cox’s chief economist. New car loans also became more expensive, albeit not as much.
“The auto market will have some challenges,” said Mr. Smoke. But there’s a bright spot: “We haven’t seen any meaningful declines in approval ratings.”
There is also cause for hope in the wine industry. Winemakers have been on their toes since the Silicon Valley bank collapse, said Douglas MacKenzie, partner at consulting firm Kearney, partly because many big banks “don’t know the difference between a $100 case of Sauvignon and a $2,000 case.” is about the valuation of collateral, which “can be quite liquid, no pun intended”.
However, he noted that Bank of Marin, a regional lender, has run ads in trade magazines saying it is open to new customers. There is also an interest in the private equity industry, which he works with.
And Ms. Puil at Boxt is determined to get through the crisis.
“I’ll find the money,” she said. Failure due to bad credit “can’t be the end of this story”.
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