In recent years, banks around the world have tightened credit conditions after bank collapses, responding to economic shocks and rising policy rates. The collapse of Silicon Valley Bank in 2023 highlighted how quickly lenders can shift their standards when uncertainty spikes.

For both borrowers and lenders, understanding the broader economic context is no longer optional—it is essential. Credit access, pricing, and approval rates all hinge on the interplay between macroeconomic trends and risk appetite.

Understanding Credit Supply and Demand

Credit supply fluctuates as banks balance risk and return. In 2023, about half of the observed tightening in lending standards stemmed from banks’ growing risk aversion tendencies, while the other half reflected fundamentals such as slower loan demand.

When interest rates climb, borrowers often pull back, reducing demand. Lenders then adjust rates and collateral requirements, creating a feedback loop that can either restrain or stimulate economic activity.

• Risk aversion increases during market volatility.
• Loan demand falls as borrowing costs rise.
• Collateral requirements tighten to mitigate losses.

Reading Macroeconomic Indicators

Macroeconomic signals such as unemployment, inflation, and GDP growth anchor credit decisions. Each one-point rise in unemployment leads to a 1.8% drop in consumers entering the credit market, and a 2.7-point increase in the average credit score of those who do enter.

This shift can persist for up to a decade, shaping consumer borrowing behavior long after a downturn ends. Higher unemployment also nudges more consumers toward student loans while restricting access to auto and revolving credit.

While credit quality is expected to “normalize,” modest rises in delinquencies and net charge-offs are on the horizon. These movements remain well below crisis-era peaks but signal the need for vigilance.

Credit Quality Trends and Risk Management

As economic growth slows, lenders prioritize expense and risk management strategies. For regional banks heavily exposed to commercial real estate, especially office loans, this means closely monitoring default probabilities and local market indicators.

Dynamic model calibrations help institutions adjust underwriting criteria in real time. By tracking credit score distributions and cut-off thresholds, banks can respond swiftly to shifts in borrower risk profiles.

• Regularly review portfolio stress test results.
• Adjust collateral and covenants for higher-risk sectors.
• Implement proactive loss mitigation programs.

Innovations in Credit Scoring Models

Traditional credit scores paint static snapshots. Increasingly, lenders are embracing dynamic, forward-looking view approaches by using trended credit data and machine learning.

Advanced models can analyze payment patterns, credit utilization trends, and external data sources to predict borrower behavior under various economic scenarios. This improves accuracy and supports more equitable access for underrepresented groups.

• Machine learning enhances predictive power.
• Trended data reveals payment consistency.
• Alternative data sources expand risk insights.

Implications for Borrowers and Lenders

Borrowers face stricter credit access during downturns and may see costs rise. To navigate these conditions, consumers should:

• Maintain on-time payments to protect scores.
• Diversify credit types responsibly.
• Monitor macroeconomic trends and adjust budgets.

Lenders must strike a balance between meeting customer needs and safeguarding portfolios. That involves ongoing adjustments to lending criteria, frequent scenario analysis, and transparent communication with clients.

Conclusion: Embracing Economic Context

In an era of rapid economic shifts, credit evaluation cannot rely on past assumptions alone. Lenders who integrate macroeconomic insights into their underwriting and risk management processes are better positioned to weather turbulence.

Meanwhile, informed borrowers who understand how broader conditions shape loan availability and pricing can make strategic decisions about when and how to borrow. Together, these approaches foster resilience and mutual benefit in the credit markets.