Some banks tightened standards for commercial RE loans in ‘all categories’ during 2nd quarter, survey shows

Domestic banks responding to the Federal Reserve’s July senior loan officer opinion survey reported tightened standards over the past three months across all three major commercial real estate (CRE) loan categories – construction and land development loans, nonfarm nonresidential loans, and multifamily loans, the Fed reported Monday.

These findings are presented in the Fed’s July 2019 Senior Loan Officer Opinion Survey on Bank Lending Practices. The survey addressed changes in the standards and terms on, and demand for, bank loans to businesses and households over the past three months, which generally corresponds to the second quarter of 2019.

For this survey, responses were received from 74 domestic banks and 22 U.S. branches and agencies of foreign banks. Respondent banks received the survey on June 24, with responses due by July 5.

While reportedly tightening standards for all three major CRE categories, the domestic banks indicated that, on balance, they left their standards basically unchanged on commercial and industrial (C&I) loans to large and middle-market firms, while standards eased for such loans to small firms. Most terms were reportedly eased on C&I loans across firm size categories, the report says.

The banks reported basically unchanged demand for C&I loans from large and middle-market firms and weaker demand from small firms. Loan demand for construction and land development loans reportedly weakened, while demand for other CRE loan types remained basically unchanged during the same period.

Almost all of the banks that reported reasons for easing standards or terms on C&I loans over the past three months cited increased competition from other lenders as an important reason for doing so, the Fed reported. “Significant net shares of banks also reported improvements in banks’ current or expected capital position, a more favorable or less uncertain economic outlook, and increased tolerance for risk as important reasons for easing standards,” it said. “Meanwhile, major net fractions of banks that reported tightening C&I lending standards or terms mentioned a less favorable or more uncertain economic outlook, worsening industry-specific problems, and reduced tolerance for risk as important reasons for doing so.”

For loans to households, banks reported that standards on credit card loans tightened, on net, while standards reportedly remained basically unchanged on auto loans and most categories of residential real estate (RRE) loans. Banks reported stronger demand for credit card loans, auto loans, and almost all categories of RRE loans.

The banks also responded to a set of special questions inquiring about the current level of lending standards relative to the midpoint of the range over which banks’ standards have varied since 2005. On balance, they said their lending standards on C&I loans are currently at the easier end of the range of standards between 2005 and the present. For CRE loans, most RRE loans, subprime credit card loans, and subprime auto loans, banks reported currently having relatively tighter levels of lending standards on net.

The July 2019 Senior Loan Officer Opinion Survey on Bank Lending Practices