A recent survey by the Federal Reserve shows that U.S. banks are tightening their credit standards and experiencing weaker demand for loans from both businesses and consumers. This is likely a result of the Federal Reserve’s interest-rate hike campaign, which is intentionally slowing down financial activities in the biggest economy in the world.
The survey, known as the Senior Loan Officer Opinion Survey (SLOOS), also indicates that banks expect to further tighten their lending standards for the rest of 2023. The main reasons cited for this tightening are a less favourable or uncertain economic outlook, an expected decline in collateral values, and an anticipated fall in credit quality for commercial real estate and other loans.
“The most cited reasons for expecting to tighten lending standards were a less favourable or more uncertain economic outlook, an expected deterioration in collateral values, and an expected deterioration in the credit quality of CRE (commercial real estate) and other loans,” the Fed said.
Since March 2022, the Federal Reserve has raised interest rates by 5.25 percentage points, and the survey shows that banks have been responding by reducing their lending. The recent SLOOS report suggests that this credit-tightening trend is continuing.
“You’ve got lending conditions tight and getting a little tighter, you’ve got weak demand, and… it gives a picture of a pretty tight credit conditions in the economy,” Fed Chair Jerome Powell said last week when asked about the survey results.
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While the survey doesn’t indicate a rush to tighten credit to an extreme degree, it does suggest a significant tightening compared to historical standards. Some experts who spoke to Reuters agreed that such tightening has historically been associated with economic recessions, although it’s not a guarantee of a recession to come.
The survey data revealed that around half of the banks reported tightening credit terms for commercial and industrial loans to medium and large businesses, as well as for small firms.
While these percentages are lower than those seen during the peak of the pandemic in 2020, they are the largest increases since the first quarter of 2009, during the Great Financial Crisis.
Demand for commercial and industrial loans remained weak, but not as weak as in the previous survey covering the first three months of the year. Large and medium firms showed slightly stronger demand in the latest survey, while demand from small firms also saw a slight improvement.
Overall, the survey suggests that banks are exercising caution in their lending practises, which could have implications for the economy’s growth and the Federal Reserve’s plans for further policy tightening.
