The Cost of Credit
The well documented failures of Silicon Valley and Signature Banks have raised fundamental questions about the role of federal regulators, the importance of regional vs. national banks, as well as the overall state of the U.S. economy.
Questions about the economy were part of the discussion between members of the U.S. Senate Finance Committee and Treasury Secretary Janet Yellen last week. When asked about the state of the U.S. banking systema and what it could mean for consumers and businesses alike, she responded: “If banks are under stress, they might be reluctant to lend. We could see credit become more expensive and less available.”
Secretary Yellen’s comments are a reminder that consumer don’t look to just banks for credit. There are millions of American consumers who do not have a bank account. Millions more do not qualify for bank loans due to less than stellar credit. These consumers typically look to finance companies for their credit needs.
But regardless of what type of credit consumers access, higher interest rates from the Federal Reserve increase costs for lenders. Lenders respond to higher costs in different ways, including lowering the lending risks by tightening their lending requirements, passing those cost increases onto consumers, or reducing their expenditures with layoffs.
The current financial churn is also a reminder that other policies can further limit access to credit, such as caps on annual percentage rates. This all contributes to an economic environment that harms the types of consumers who may need a loan the most: the non-bank-account-holding consumers with a few dings on their credit reports, who probably will never need a bailout, but would most likely appreciate knowing they have access to an affordable form of credit an emergency expense pops up.
March 20th, 2023
