Fynsa
The U.S. Federal Reserve's Senior Loan Officer Opinion Survey (SLOOS) conducted in April (see more) provides information on bank lending activity during the first quarter of this year. According to the results, lending standards tightened on net, and demand for commercial and industrial loans, as well as commercial real estate loans, weakened for businesses of all sizes.
On the household side, banks reported tighter standards across all consumer loan categories. In addition, weaker demand for auto and other consumer loans was observed, while demand for credit card loans remained basically unchanged.
Banks cited several reasons for this tightening of standards and weakening demand.. These include a less favorable or more uncertain economic outlook, reduced risk tolerance, deteriorating collateral values, and concerns about banks' funding costs and liquidity positions.
Although overall the report does not show a significant worsening compared to the previous report (as the tighter credit standards were already coming from near record levels), the details are slightly worse (e.g. in the multifamily residential and CRE [Commercial Real Estate] categories), the details are slightly worse (e.g., in the multifamily residential and CRE [Commercial Real Estate] categories).
In particular, demand for C&I (commercial and industrial) loans from large and mid-size companies weakened considerably in the first quarter. Fifty-six percent of banks on net reported weaker demand for large and middle-market C&I loans, up from 31% in the previous survey. Fifty-three percent of banks reported weaker demand for small business commercial and industrial loans, up from 42% in the previous quarter.
As for Commercial Real Estate (CRE) lending standards, they tightened in the first quarter.. A net 74% (+5 pp) of banks reported tighter credit standards for construction and real estate development loans, while 65% (+8 pp) reported tighter credit standards for loans secured by multifamily residential properties. In addition, the number of banks reporting tighter standards for loans secured by non-residential non-agricultural properties increased to 67% (+9pp).
Finally, in the special questions, none of the banks expected their credit standards for C&I loans (and most other types of loans) to relax during the remainder of 2023, while 33% expected them to tighten further, suggesting that credit standards may continue to tighten.
At the last U.S. monetary policy meeting, the Fed made it clear that it now sees credit tightening as a done deal, which adds to the case for a pause in rate hikes at upcoming meetings.. (see more)
Recent stresses in the banking sector imply tighter credit standards. Although banks' liquidity problems (due to deposit flight) could slow interest rate increases, "friendly" monetary policy is less likely to support markets if financial conditions tighten.
The risk going forward is that the uncertainty generated by deposit movements will cause banks to become even more cautious about lending.. This risk is potentially increased by the fact that small and medium-sized banks play a very important role in U.S. bank lending. By way of background, small and mid-sized banks in the U.S. account for about 80% of total Commercial Real Estate lending (see more)
