SVB’s failure didn’t start the U.S. credit crunch and may not finish there. Carissa Rodeheaver, CEO of a small bank in western Maryland’s mountains, didn’t change tactics after Silicon Valley Bank’s March 10 failure.

Last year, Federal Reserve interest rate hikes and a less certain economic environment caused Rodeheaver, CEO of the $1.9 billion First United Bank & Trust (FUNC.O) in Oakland, Maryland, to shift focus from commercial real estate lending, begin “husbanding deposits” with a tougher look at collateral backing loans, and end up with only a $9.6 million increase in lending over the first three months of 2023.

“When you get into higher interest rates… you look to your collateral,” Rodeheaver said in an interview. Price and profitability are tightening… Lending will slow.”

U.S. central bank officials may take comfort from First United’s experience that the worst credit shock was avoided despite the dramatic collapses of SVB and Signature Bank two months ago and First Republic Bank more recently.

First United’s first-quarter results showed that some account holders spent down balances, and others sought higher interest rates. Still, the company boosted its cash with brokered deposits and “strategic” borrowing from the Federal Home Loan Bank system.

Lending grew even if modestly. That might be the difference between Fed worries about an economy-wrecking credit crisis and the restraint policymakers need to control inflation as they hike rates.

This week’s Fed report on financial stability and central bank survey of bank loan officers confirmed that the banking system wasn’t in crisis but was making credit less available and more expensive, which should reduce consumer and business spending and lower inflation.

“Data showing that banks have started to raise lending standards… is typical for where we are in the economic cycle,” Fed Governor Philip Jefferson said Tuesday. “The economy has started to slow in an orderly fashion” due to increased interest rates, Jefferson added, calling tighter credit “part of the transmission mechanism of monetary policy.”

After the Fed hiked its policy rate to 5.00%-5.25% at a meeting last week, the debate switched to whether policymakers would find that level sufficient to moderate inflation and stop the tightening cycle or if more rises would be needed.

One question is whether the banking sector, frightened by the collapse of the three regional institutions and facing the highest rate rises since the 1980s, will tighten lending enough to cause a recession.

“The potential economic effects of the recent banking-sector developments” might move the Fed’s view from “subdued growth” to a “mild recession” later this year, according to the March 21-22 meeting minutes. At last week’s meeting, Fed Chair Jerome Powell confirmed staff prediction.

Powell said the credit shock’s impact “remains uncertain,” but his baseline view does not include a recession.

Recent statistics and poll answers also trend away from severe results. For example, Bank lending fell 1.7% two weeks after SVB’s failure, although it has recovered nearly a third of the loss.

After SVB’s collapse, the Fed’s Senior Credit Officer Opinion Survey, issued on Monday, showed a modest increase in banks tightening critical business credit conditions. Likewise, on Monday, the Fed’s semi-annual financial stability report saw no widespread crisis.

Investors increased their bets that the Fed would raise rates at its June meeting while they still offer more than an 80% chance that it will not.

Analysts believe the loan officers poll may be less noteworthy for what it says about credit following the SVB collapse than for what it may suggest about how a deteriorating economy may impact loan demand and supply.

Loan officers noted significant credit tightening this year, notably for commercial real estate loans, and decreased demand for a wide range of financing.

In April, NFIB reported a “historically weak” 19% of enterprises’ planned capital outlays in the following three to six months. As a result, the index dropped for more than ten years.

The Fed loan officers survey showed a general wariness about the economy. Respondents said they planned to tighten credit due to risk and concerns about collateral value rather than their capital or liquidity positions, which could indicate broader financial stress.

“There is a threat of recession and obviously we see that, we are planning for it,” said Greg Hayes, president, and chief operating officer of Kish Bank in central Pennsylvania. “The question is will the Fed back off at the right time or overshoot?”

Ramon Looby, president, and CEO of the Maryland Bankers Association, said Fed rate rises “might be pricing folks out and having them wait on projects,” causing loan demand to plummet.

Banks “are still making deals,” Looby added. “The Fed and Chair Powell have made it incredibly plain that they will manage inflation through tightening financial conditions… The industry’s response will be on liquidity and prudence.