Banks Tightening Credit Standards, According to Fed Survey

The most recent quarterly senior loan officer opinion survey from the Federal Reserve found banks reporting both weaker demand and stricter standards for commercial and industrial real estate, consumer loans, and mortgages. Since many economists have predicted a mild recession this year, banks have become more selective when lending, with increased potential for borrowers to miss payments.

“Overall, the survey paints a sobering picture of the state of loan demand and standards,” said Scott Siefers, analyst at Piper Sandler, according to American Banker. “On the one hand, such dynamics are logical considering the softening economic picture. But on the other, they reinforce the notion of a weakening revenue backdrop and uncertain credit environment.”

Mortgage rates doubled last year, causing the slowdown in residential real estate lending, and consumer loans have followed suit for the first time since 2020. 69 domestic banks as well as 18 U.S. branches and agencies of foreign banks responded to the Fed’s survey, citing rising interest rates and inflation as reasons to be more selective about lending.

Since interest rates rose last spring, both consumers and business owners have struggled with high overall expenses. Last June, inflation reached a 40-year high above nine percent, and although it fell to 6.5 percent in December, it is still substantially higher than the Fed’s preferred level of about two percent.

D.A. Davidson analysts said that when banks became cautious in the past, credit challenges typically followed. Institutions like Bank of America, First Bank in New Jersey, and U.S. Bancorp in Minnesota expect slower growth throughout 2023.

“History has shown when banks go from easing underwriting standards to tightening, the bank group starts to enter the next phase of the credit cycle as net charge-offs begin to increase roughly one to three quarters later,” said the Davidson analysts in a report.