Banks tightened commercial lending standards in the second quarter amid economic uncertainty, according to the Federal Reserve’s July Senior Loan Officer Opinion Survey on Bank Lending Practices.
According to the survey, 50.8 percent of banks tightened commercial and industrial loan standards for large and medium businesses, up from 46 percent in the first quarter. For small businesses, 49.2 percent of banks tightened their standards, up from 46.7 percent the previous quarter. Banks also reported tighter standards and reduced demand for commercial real estate lending. Tightening was most frequently reported for loan rate spreads over the cost of funds, premiums charged on risky loans, and the cost of credit lines.
“Banks reported that, on balance, levels of standards are currently on the tighter end of the range for all loan categories,” the Fed stated. “Compared with the July 2022 survey, banks reported tighter levels of standards in every loan category.”
Banks expect to continue tightening lending standards across all categories during the second half of this year amid economic uncertainty and expected deterioration in collateral values and the credit quality of loans.
“Major net shares of banks also cited an expected reduction in risk tolerance, an expected deterioration in their liquidity position, increased concerns about funding costs and deposit outflows, as well as increased concerns about the effects of legislative, supervisory or accounting changes as reasons for expecting further tightening,” the Fed stated.
The Federal Open Market Committee raised rates to 5.25 to 5.50 percent in July, its 11th increase in 17 months, to bring inflation down to the FOMC’s long-term 2 percent target. CPI inflation increased 3 percent last month, its smallest rise since March 2021. The Fed hasn’t said when or if it would raise interest rates again.
Despite the concerns of bankers, the odds of the US avoiding a recession are rising. Goldman Sachs economists say there’s only a 20 percent chance of a recession in the next 12 months, down from their previous projection of 25 percent. Those odds are much lower than the 54 percent median among forecasters in the most recent Wall Street Journal survey, which is down from 61 percent three months ago.