Surveys point to tightening lending conditions

Banks will continue to tighten business lending standards throughout the rest of this year as they become more risk-averse amid recessionary fears, according to April’s Federal Reserve Senior Loan Officer Opinion Survey.  

“Banks most frequently cited an expected deterioration in the credit quality of their loan portfolios and in customers’ collateral values, a reduction in risk tolerance, and concerns about bank funding costs, bank liquidity position, and deposit outflows as reasons for expecting to tighten lending standards over the rest of 2023,” the Federal Reserve stated. 

The Fed has raised interest rates to 5.00 to 5.25 percent from near-zero at the beginning of 2022 to cool the economy, raising concerns that a recession will soon begin. Confidence in the economy remains stunted, even as consumer demand remains strong and unemployment is low at 3.4 percent. 

According to the report, banks — especially mid-sized institutions — tightened lending standards during the first quarter of this year amid the March failures of large mid-sized institutions Silicon Valley Bank and Signature Bank. Standards tightened on commercial and industrial loans to firms of all sizes, and for all commercial real estate lending categories — especially through wider spreads of loan rates over banks’ cost of funds and lower loan-to-value ratios. Tightened standards were also reported across residential real estate lending segments other than GSE-eligible and government residential mortgages, which both remained essentially unchanged.

More stringent lending requirements were also reported in April’s Biz2Credit Small Business Lending Index. According to the report, 18.7 percent of business loans were approved at small banks last month, down from 19.1 percent in March, even as approval rates at non-traditional lenders increased in each of the categories the index monitors. 

“The instability in the banking system goes well beyond the recent collapses of Silicon Valley Bank and Signature Bank,” said Rohit Arora, Biz2Credit CEO. “First Republic, a bank that was run much more responsibly than SVB, was taken over by the FDIC, and its assets were sold to JPMorgan Chase. Other midsize and regional banks may also be in trouble as business accounts continue to withdraw their money and shift it to big banks or money market accounts.”