Banks tightened commercial lending standards amid weakened demand in the fourth quarter of last year, according to the Federal Reserve’s January Senior Loan Officer Opinion Survey on Bank Lending Practices.
Commercial and industrial loan tightening was especially reported for premiums charged on higher risk loans, costs of credit lines, spread of loan rates over the cost of funds and collateralization requirements. A substantial number of banks that tightened C&I loan standards or terms cited a less favorable or more uncertain economic outlook; less risk tolerance; more aggressive competition from banks or nonbank lenders; and worsening current or expected liquidity positions.
“Significant net shares of banks also cited the worsening of industry-specific problems; decreased liquidity in the secondary market for C&I loans; increased concerns about the effects of legislative changes, supervisory actions, or changes in accounting standards; and deterioration in their current or expected capital position as important reasons,” according to the report.
Banks also reported tightening lending standards for credit cards and other consumer loans, while some tightened standards for auto loans. Banks also tightened most credit card loan queried terms.
Banks saw a drop in the number of inquiries from potential borrowers on the availability and terms of new credit lines or increasing existing lines. Of those seeing weakened demand for C&I loans, many said their customers had cited less investment in plants or equipment and fewer financing needs for inventories, accounts receivable and M&A activity.
Many also reported weaker demand for loans secured by multifamily residential properties and nonfarm nonresidential properties, while a significant portion experienced less demand for construction and land development loans.
“Banks reported tighter standards and weaker demand for home equity lines of credit,” according to the survey. “Moreover, for credit card, auto and other consumer loans, standards reportedly tightened, and demand weakened on balance.”
Banks anticipate lending standards will remain unchanged for C&I and residential real estate loans this year, but expect further tightening for CRE, auto and credit card loans. “Banks reported expecting loan demand to strengthen across all loan categories, and loan quality to deteriorate across most loan types,” according to the survey.
The most frequently cited reasons for expecting lending standards to tighten this year include weakening collateral values, a worsening economic outlook, deterioration in loan portfolio credit quality and liquidity position, reduced openness to risk tolerance, and increased worries about funding costs and the impacts of new legislation or regulations.