Credit Demand Expected to Tighten in 2019

According to a recent survey by the Federal Reserve, banks are expecting a decline in loan demand in conjunction with a deterioration of loan performance over the course of 2019. The survey was conducted over the past three months, generally corresponding to the fourth quarter of 2018.

The Federal Reserve administers the Senior Loan Officer Opinion Survey on Bank Lending Practices each quarter, providing updates on the “changes in the standards and terms on, and demand for, bank loans to businesses and households.”

A net share of banks stated that they were tightening standards on credit card loans and imposing tighter credit limits on credit cards, which could be a result of weaker demand for consumer credit as reported by survey participants.

In addition, banks are “expecting tighter standards, weaker demand, and worse loan performance, for most loan categories.” Banks cited a deterioration in collateral values, an expected reduction in risk tolerance, and an expected decline in the quality of loan portfolios over 2019.

Gregory Daco, chief U.S. economist with Oxford Economics, argues that banks generally have a weaker appetite for risk today than in years prior. “If you look at the underlying reasons that are listed as to why banks are tightening standards, for instance, it doesn’t seem to me that this is all cyclical. In an environment where growth is falling, you’re going to be less tolerant of risk-taking than in an environment where growth is accelerating,” said Daco. “If you were going to compare 2017 to 2019, tolerance for risk is going to be lower.”