The tumult at midsize institutions has prompted banks to tighten lending standards to households and businesses, which could threaten U.S. economic growth, according to a report from the Federal Reserve on Monday.
The Fed’s Quarterly Opinion Survey of Senior Loan Officers indicates that requirements have become stricter for commercial and industrial loans as well as for many household debt instruments such as mortgages, lines of credit home equity and credit cards.
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Loan officers further said they expected the problems to persist over the next year, largely due to diminishing expectations for economic growth as well as fears over deposit outflows. and reduced risk tolerance.
Asked about their expectations for next year, respondents gave a rather gloomy view of what awaits them.
“Banks said they expect to tighten standards across all lending categories,” the report said. “Banks most often cited an expected deterioration in the credit quality of their loan portfolios and the value of customer collateral, a reduction in risk tolerance and concerns about banks’ funding costs, the position bank liquidity and deposit outflows as reasons to expect tighter lending standards over the remainder of 2023.”
At the same time, the survey showed that demand has weakened in most categories.
In particular, the report showed “tighter standards and weaker demand” for commercial and industrial loans, an important indicator of economic growth. These conditions were observed across all company sizes.
Additionally, the report showed the same conditions across all categories of commercial real estate.
“There’s been a continuous tightening of lending conditions. And that’s part of the process by which monetary policy works,” Treasury Secretary Janet Yellen told CNBC’s Sarah Eisen in response to a question about the report in a post. Monday “Closing Bell” interview. “The Fed is aware that tighter credit conditions will tend to slow the economy somewhat. And I think they take that into account when deciding the appropriate policy.”
The survey was closely watched on Wall Street to gauge the fallout from the banking sector turmoil that accelerated in early March.
That’s when regulators shuttered Silicon Valley Bank and Signature Bank following a run on deposits spurred by a loss of confidence that institutions would have the cash to meet their obligations.
From, JP Morgan took over First Republic Bank following similar issues in that business, and UBS bought rival Credit Suisse after the latter needed bailouts.
Even with the banking troubles, the central bank decided last week to raise interest rates for the 10th time since March 2022. Policymakers had already seen the SLOOS report before their meeting ended on Wednesday, and the chairman of the Fed chief Jerome Powell said conditions were about as expected given what has happened in the sector.
“The SLOOS is broadly consistent when you see it with how we and others have thought about the situation and what we see from other sources,” Powell told reporters. “Banking data will show lending has continued to grow, but the pace has really slowed since the second half of last year.”
At the March meeting, the Fed’s own economists warned that a shallow recession was likely later in the year due to tightening standards stemming from banking problems.