Survey Shows Banks Tightening Business Loan Standards

According to a recent survey conducted by the Federal Reserve, banks have continued to tighten their standards for business loans in the third quarter. Additionally, a significant number of banks also tightened lending standards for credit-card, automobile, and other consumer loans.

Key Details

Banks have tightened standards on loans to firms of all sizes. This tightening has been seen in premiums for riskier loans, spreads of loan rates over the cost of funds, and costs of credit lines.

Simultaneously, there has been a weaker demand for loans from firms of all sizes. Many banks have reported a sharp drop in the number of inquiries from potential borrowers.

Demand for consumer loans has also weakened.

When asked about the reason behind tightening standards for all loan categories, the most frequently cited answers by banks were a less favorable economic outlook, reduced tolerance for risk, deterioration in credit quality of loans, and concerns about funding costs.

Impact on Real Estate

Banks have tightened lending standards across all categories of residential-real-estate loans, with the exception of government residential mortgages. Furthermore, there has been a weakening demand for all home loans.

The Tightening of Bank Standards for Commercial-Real-Estate Loans

The tightening of bank standards has become a major concern for the economy as it continues to impact the lending industry. This has been a growing trend since mid-2022, but it gained widespread attention after the collapse of Silicon Valley Bank, Signature Bank, and First Republic Bank in spring 2023. Richard Moody, the chief economist at Regions Financial Corp, points out that this tightening was expected to have a significant impact on the economy as the year progresses.

Bank lending has already experienced a decline below 4% on a year-over-year basis in October, which historically is a very weak number. With the Federal Reserve's recent interest-rate policy statement acknowledging that "tighter financial and credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation," economists are concerned that this tightening of lending has not yet reached its peak.

Potential Credit Crunch and Recession Concerns

Economists express their worries about the possibility of a potential credit crunch that could ultimately lead the economy into a recession next year. The ongoing tightening of lending standards raises concerns about access to credit for both individuals and businesses alike.

Market Reaction

In response to these concerns, the stock market experienced a decline in the value of stocks such as DJIA and SPX during afternoon trading on Monday. Conversely, the 10-year Treasury yield, BX:TMUBMUSD10Y, rose to 4.66%.

Overall, the tightening of bank lending standards for commercial-real-estate loans is causing apprehension among economists, leading to concerns about a potential credit crunch and its impact on the overall economy. The market has already started to react, further emphasizing the significance of this issue.