Senior loan officers tightened lending standards for both businesses and consumers during the fourth quarter of last year as they became more risk-averse due to mounting fears of a recession, according to a Federal Reserve senior loan officer opinion survey.
“Significant net shares of banks also cited decreased liquidity in the secondary market for C&I loans, less aggressive competition from other banks or nonbank lenders, deterioration in their current or expected liquidity position and increased concerns about the effects of legislative changes, supervisory actions or changes in accounting standards as important reasons for tightening lending standards and terms,” the report stated.
Most senior loan officers who reported less demand for C&I lending cited a drop in plant or equipment investments and less financing needs for M&As, inventories and accounts receivable. According to S&P Global, total values for fourth-quarter M&A in the United States and Canada fell 41 percent from the previous year’s record high to $1.47 trillion as the Fed continued to raise interest rates. Both M&A and consumer demand had skyrocketed early in the pandemic as the Fed’s quantitative easing inundated companies with cash and inexpensive credit.
Lending standards also tightened for residential real estate and home equity lines of credit as demand weakened. Tightening standards and weakening demand were also seen in credit card lending along with auto and other consumer loans.
Loan officers most often reported tightening lending standards for premiums on riskier loans, the spreads of loan rates over the cost of funds and on the costs of credit lines. “Significant net shares of banks reported having tightened loan covenants and collateralization requirements to firms of all sizes,” the Fed stated.