The impact from current bank failures and seizures is that all other banks must now hold more reserves and decrease risk on their portfolio of loans. But these bank fiascos are unfurling while the Fed and Treasury attempt to steady inflation by taking money out of the economy by raising interest rates.
This has the impact of creating attractive risk-minimal investment options. At the beginning of 2022, a six-month Treasury bond paid an interest rate of 0.22%. The same bond today pays 4.76%. This again takes money out of the economy by luring investor to safe ground.
All of this is intended to slow down the volume and speed at which money changes hands, hopefully cooling down inflation. In the long run, that will be good for us all, but what about right now?
Project funders’ cost of capital is up, and their risk is up as well.
The vast majority of small-to-medium C&I project financing is done by private capital, not banks. But investors often increase their returns by leveraging their capital, borrowing from banks to create a much larger investment fund. Since, for those corporate borrowers, the cost of capital is going up, the returns they must make from the project in turn must go up.
Also, because of all the uncertainty just described above, the economy is considered less stable, and the risk of a project turning bad is increased, making funders less interested in taking risk. If it’s not a strong project, funders are more likely to pass.
This is the 10-yr Treasury Yield history since July 2021 to today, on which many funding products on CleanFi are floated.
For a live version of the above chart, please see this direct link to the US Treasury Yield data.