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Banks reported weaker demand for loans in the first quarter amid tighter standards spurred by an uncertain economic outlook and lower risk appetite. They expect tighter controls for the rest of the year as they see further deterioration in credit quality.
A Federal Reserve survey of senior loan officers showed that the situation was identical for business loans of commercial and industrial categories. The situation was identical for commercial real estate loans also.
In the case of loans to households, the lending standards tightened for all categories of residential real estate, except for government-sponsored enterprise-eligible and government residential mortgages, which remained unchanged from the previous quarter.
While demand weakened for all residential real estate loans, the banks reported tighter standards and weaker demand for home equity lines of credit. Standards tightened for all consumer loan categories; demand weakened for auto and other consumer loans, while it remained basically unchanged for credit cards, the report said.
The April SLOOS (Senior Loan Officer Opinion Survey) included three sets of special questions, which inquired about banks' changes in lending policies for CRE loans over the past year; about the reasons why banks changed standards for all loan categories over the first quarter; and about banks' expectations for changes in lending standards over the remainder of 2023 and reasons for these changes.
In response to the first set of special questions, banks reported tightening lending policies for all categories of CRE loans over the past year, with the most frequently reported changes pertaining to wider spreads of loan rates over banks' cost of funds and lower loan-to-value ratios.
Regarding the second set of special questions about reasons for changing standards on all loan categories in the first quarter, banks cited a less favorable or more uncertain economic outlook, reduced tolerance for risk, deterioration in collateral values, and concerns about banks' funding costs and liquidity positions.
To the last set of special questions about outlook for lending standards over the remainder of 2023, banks reported expecting to tighten standards across all loan categories. 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.