Banks tightened their business lending standards and saw weaker demand for both commercial and industrial and commercial real estate loans during the third quarter, according to the Federal Reserve’s Senior Loan Officer Opinion Survey on Bank Lending Practices.
For C&I loans, banks reported tightening premiums on higher-risk loans, the costs of credit lines, and spreads of loan rates over the cost of funds. Also, many banks tightened loan covenants to both middle-market firms and large firms, while a moderate net share of banks tightened covenants to small firms.
“Significant net shares of banks also cited decreased liquidity in the secondary market for C&I loans and less aggressive competition from other banks or nonbank lenders as important reasons for tightening lending standards and terms,” the report stated.
Most banks that tightened CRE lending cited more stringent requirements for construction, nonfarm nonresidential, multifamily and land development loans. A modest net share of banks saw weaker loan demand for loans from large and middle-market companies, and a significant share experienced weaker demand from small firms as fewer small businesses financed inventory, invested in plants or equipment or financed M&A activity and accounts receivable.
The tightened standards come as banks prepare for a recession. According to the survey, more than 40 percent expect that a recession will begin in the next 12 months. Most said that if a recession were to happen, it would be “mild to moderate in severity,” and that they would tighten lending standards even more in the event of a downturn.
The CRE market also remains unsettled as many businesses navigate the post-pandemic terrain. HTG Architects President Sean Raboin said a key driver of the CRE market downturn is the continued staff shortage many manufacturing firms continue to face, leading to a backlog of construction supplies.
Raboin noted that some organizations don’t feel like they need employees to return to the physical office, while others have ordered workers to come back. To Raboin, much of the recessionary fears businesses and consumers have stems back to the Great Recession, which was the last prolonged economic downturn. However, Raboin said the expected recession will be milder and involve a market correction following a period of extensive stimulus.
Standards for credit card loans and other consumer loans also tightened. Demand reportedly strengthened for credit card loans. “Banks reported they were less likely to approve such loans for borrowers with FICO scores of 620 and 680 in comparison with the beginning of the year, while they were much more likely and about as likely to approve credit card loan and auto loan applications, respectively, for borrowers with FICO scores of 720 over the same period,” the report stated.
Household lending standards tightened or remained unchanged across all residential real estate loan categories, according to the Fed, as demand weakened. Many banks reported less demand for residential real estate loans, except for home equity lines of credit, which a moderate net share said had strengthened in demand.