A Federal Reserve report issued Monday indicated that lending conditions at US banks are tight and expected to tighten even further.
The Fed's widely monitored Senior Loan Officer Opinion Survey revealed that, as lending conditions tightened, demand fell.
These findings are significant because analysts who forecast a recession believe that the banking sector would be the most probable source, having had to respond to a series of 11 interest rate rises as well as a brief crisis in March when three smaller institutions collapsed.
“Regarding banks’ outlook for the second half of 2023, banks reported expecting to further tighten standards on all loan categories,” the Fed said in a survey summary. “Banks most frequently cited a less favorable or more uncertain economic outlook and expected deterioration in collateral values and the credit quality of loans as reasons for expecting to tighten lending standards further over the remainder of 2023.”
Regarding consumer lending, banks “reported having tightened standards for credit card loans and other consumer loans, while a moderate net share reported having done so for auto loans.”
Banks also stated that they are raising the minimum credit score for personal loans and limiting credit limits in the $1.9 trillion consumer-loan market.
The poll found that a “major” percentage of banks in the $2.76 trillion commercial and industrial lending market had reported decreasing demand for loans due to tightened requirements across all business sizes.
Commercial real estate also saw a substantial percentage of banks indicate they had tightened requirements due to decreased demand.
Fed officials say they are aware of the banking sector's difficulties, yet they continue to hike interest rates in an attempt to reduce inflation.
Fed Chair Jerome Powell stated at his post-meeting press conference last week that the loan survey would be “consistent with what you would expect.”
“You’ve got lending conditions tight and getting a little tighter, you’ve got weak demand, and you know, it gives a picture of a pretty tight credit conditions in the economy,” Powell said.
At the meeting, the Fed raised its benchmark interest rate by another quarter percentage point, bringing it to a target range of 5.25%-5.5%, the highest in more than 22 years.