WASHINGTON–As they did in a prior survey, senior loan officers at banks are reporting tighter underwriting standards, while also citing weaker demand for commercial and industrial (C&I) loans and commercial real estate loans, according to the Federal Reserve’s newest Senior Loan Officer Opinion Survey.
“Banks continued to tighten standards in the first quarter, and they expect further tightening as the year progresses, particularly for commercial loans,” said NAFCU Chief Economist Curt Long.
“There was a stark divide between banks with over $50 billion in assets—who are less likely to anticipate further tightening and who expect to do so to address falling collateral values and rising delinquencies—and those with under $50 billion, who were more likely to expect further tightening to address their bank’s liquidity positions.”
Key Findings
According to the Fed, among the key findings in the latest Senior Loan Officer Opinion Survey, which includes responses from 65 domestic banks and 19 U.S. branches and agencies of foreign banks between March 27, April 7.
- Regarding loans to businesses, survey respondents reported, on balance, tighter standards and weaker demand for commercial and industrial (C&I) loans to large and middle-market firms as well as small firms over the first quarter. Meanwhile, banks reported tighter standards and weaker demand for all commercial real estate (CRE) loan categories.
- For loans to households, banks reported that lending standards tightened across all categories of residential real estate (RRE) loans other than government-sponsored enterprise (GSE)-eligible and government residential mortgages, which remained basically unchanged. Meanwhile, demand weakened for all RRE loan categories.
- Regarding the second set of special questions about reasons for changing standards on all loan categories in the first quarter, banks cited a less favorable or more uncertain economic outlook, reduced tolerance for risk, deterioration in collateral values, and concerns about banks' funding costs and liquidity positions.
- Finally, regarding the last set of special questions about banks' outlook for lending standards over the remainder of 2023, banks reported expecting to tighten standards across all loan categories. Banks most frequently cited an expected deterioration in the credit quality of their loan portfolios and in customers' collateral values, a reduction in risk tolerance, and concerns about bank funding costs, bank liquidity position, and deposit outflows as reasons for expecting to tighten lending standards over the rest of 2023.
- In general, the tightening in standards for business loans was more frequently reported across the mid-sized banks than either the largest banks or other banks, both for the first quarter and in expectation for the rest of 2023. As reasons for tightening standards on all loan categories, both in the first quarter and over the rest of the year, other and mid-sized banks reported concerns about their liquidity positions, deposit outflows, and funding costs more frequently than the largest banks.