The turmoil in middle-class institutions has prompted banks to tighten lending standards for both households and businesses, a potential threat to US economic growth said Monday’s Federal Reserve report.
The Fed’s quarterly Senior Loan Officer Survey shows that requirements have become stricter for commercial and industrial loans and for many household debt instruments such as mortgages, home equity loans and credit cards.
Loan officials said they expect troubles to persist next year, mainly due to muted expectations for economic growth, fears of deposit outflows and lower risk tolerance.
When asked about their expectations for the next year, respondents gave a rather bleak outlook for the future.
“Banks said they expect to tighten standards across all loan categories,” the report says. “Most commonly, banks cited an expected deterioration in the credit quality of their loan portfolios and customers’ collateral values, a reduction in risk tolerance, as well as concerns about banks’ funding costs, banks’ liquidity position and deposit outflows as reasons for expecting a tightening of lending standards.” the rest of 2023.
At the same time, the survey showed that demand was weakening in most categories.
In particular, the report revealed “tightening standards and weaker demand” for commercial and industrial loans, a key indicator of economic growth. These conditions were observed in all company sizes.
Also, the report showed the same conditions across all commercial property categories.
“There has been a sustained tightening of credit 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 closing bell on Monday. Interview. “The Fed is aware that tightening credit conditions will tend to slow the economy somewhat. And I believe they take that into account when deciding on an appropriate policy.”
The poll was closely watched on Wall Street to gauge the fallout from the problems in the banking sector, which were accelerating in early March.
At that point, regulators shut down Silicon Valley Bank and Signature Bank following a deposit rush fueled by a loss of confidence in institutions’ liquidity to meet their obligations.
Since then, JP Morgan took over the First Republic Bank after similar problems at this company, and UBS bought rival Credit Suisse after it had to be bailed out.
Despite the banking woes, the central bank decided last week to hike interest rates for the tenth time since March 2022. Policymakers had already seen the SLOOS report ahead of their meeting on Wednesday, and Fed Chair Jerome Powell said conditions were about as expected given what was happening in the industry.
“The SLOOS are broadly consistent with how we and others have thought about the situation and what we are seeing from other sources,” Powell told reporters. “Bank data will show that lending has continued to grow, but the pace has slowed significantly since the second half of last year.”
At the March meeting, Fed economists warned that a mild recession was likely later in the year due to tightening standards amid banking problems.