Banks Unlikely to Loosen Credit Until 2024

Banks expect to continue tightening lending standards across all loan categories through the rest of 2023.

That projection comes after a quarter in which banks tightened their standards for loans to both businesses and households, the Federal Reserve reported Monday (May 8) in its “April 2023 Senior Loan Officer Opinion Survey on Bank Lending Practices.”

Asked why banks expect to continue doing so through the rest of the year, the Federal Reserve said in the report: “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 addition to tightening their standards for loans during the first quarter, banks also saw weaker demand for loans from businesses and consumers, for the most part, according to the report.

There were a few exceptions to those trends regarding consumers.

Lending standards for government-sponsored enterprise (GSE)-eligible and government residential mortgages remained unchanged, while those for all other categories of residential real estate (RRE) loans tightened during the quarter, the report said.

However, demand weakened across all RRE loan categories, according to the report.

Standards tightened for all consumer loan categories, but while demand weakened for auto and other consumer loans, it remained “basically unchanged” for credit cards, the report said.

Among businesses, the trends were true across the board. The respondents to the survey reported tighter standards and weaker demand for both commercial and industrial (C&I) loans and commercial real estate (CRE) loans, for both large- and middle-market firms and small firms, according to the report.

Asked why they changed their standards for all loan categories during 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,” the Federal Reserve said in the report.

Businesses are starting to feel the credit pinch, and that trend could lead them to reduce their investments and slow their growth, Bloomberg reported April 21.

For small businesses, it’s more difficult than it’s been in a decade to borrow, Bloomberg said at the time.