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Banks tighten credit terms, see loan demand drop, Fed survey shows

Credit conditions for U.S. business and households continued tightening in the first months of the year, according to a Federal Reserve survey of bank loan officers, but the results seemed to mark the accumulating impact of Fed monetary tightening rather than the cliff-like decline in credit some feared after the March collapse of Silicon Valley Bank.

The Fed's quarterly Senior Loan Officer Opinion Survey, or SLOOS, among the first measures of sentiment across the banking sector since the recent run of bank failures, showed a net 46.0% of banks tightened terms of credit for a key category of business loans for medium and large businesses compared with 44.8% in the prior survey in January - a modest, stepwise change.

For small firms, conditions were slightly more stringent with a net 46.7% of banks saying credit terms were stiffer now versus 43.8% in the last survey.

Banks reported that firms of all sizes were showing less demand for credit than three months earlier.

Credit access may be just part of the story, with banks also reporting they were capping loans sizes and raising the cost of borrowing.

On the consumer side, banks said soft demand prevailed again for credit card, automobile and other forms of household credit, although not to the degree seen at the end of last year. Banks on balance showed diminished willingness to provide consumer installment loans, and were also limiting the size of auto loans for example.

"It wasn’t a sea change...The tightening in standards probably wasn’t as severe as one might imagine given the banking stress," wrote J.P. Morgan Chief U.S. Economist Michael Feroli. But the drop in demand, particularly the more than half of banks seeing a drop in small firms wanting to borrow, "appears to paint a grim picture about the outlook."

The tightening also reflected modestly rising concerns among banks about the need to conserve capital and maintain adequate liquidity amid a weaker economic outlook. Mid-sized banks, the Fed said in reporting the survey results, seemed particularly stretched.

"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 release said. "Mid-sized banks reported concerns about their liquidity positions, deposit outflows, and funding costs more frequently than the largest banks."


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