WASHINGTON–Not surprisingly, the nation’s banks are reporting they tightened standards for many types of loans during the third quarter, while loan demand also weakened, according to the latest Senior Loan Officer Opinion Survey on Bank Lending Standards, released by the Federal Reserve, according to report issued Monday by the Federal Reserve.
The survey found approximately 40% of those surveyed believe a recession is possible within the next 12 months, although most expect it to be mild.
According to the Fed’s October survey, tighter standards and weaker demand in the third quarter prevailed in commercial and industrial (C&I) loans to firms of all sizes, all commercial real estate (CRE) loan categories, and all categories of residential real estate (RRE) loans (although some standards were unchanged).
Even with the tighter standards, the survey found banks reporting demand for home equity lines of credit and credit card loans grew, while demand was even for consumer loans and but slower for auto loans, according to the Fed.
According to the Fed, the survey included a set of special questions that asked banks to assess the likelihood of approving credit card and auto loan applications by borrower FICO score in comparison with the beginning of the year.
‘Better Understanding’
“The questions were aimed at developing a better understanding about how consumer lending standards have changed conditional on borrower credit quality,” the Fed said in releasing the findings.
The bankers surveyed indicated “they were less likely to approve such loans for borrowers with FICO scores of 620 and 680 in comparison with the beginning of the year, while they were more likely and about as likely to approve credit card loan and auto loan applications, respectively, for borrowers with FICO scores of 720 over this same period.”
The survey found banks assigned a probability of greater than or equal to 40% that a recession would occur any time over the next 12 months, but believe it will be “mild” to “moderate.”
Additionally, the Fed released its October Senior Loan Officer Opinion Survey results, noting that survey respondents reported tighter standards on loans to businesses and weaker demand for commercial and industrial loans to firms of all sizes over the third quarter. Meanwhile, the survey found that banks reported tighter standards and weaker demand for all commercial real estate loan categories.
NAFCU Analysis
“Banks tightened standards in the third quarter across a wide range of loan products,” said NAFCU Chief Economist and Vice President of Research Curt Long in response to the results. “With unemployment edging up in October and significant fear of a recession among respondents, it is likely that credit conditions will continue to ratchet up in the fourth quarter.”
This senior loan officer survey was based on responses from 71 domestic banks and 18 U.S. branches and agencies of foreign banks.
Access the full breakdown of survey results
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