Lending faced tighter standards, weaker demand in 2nd quarter; outlook is for more of the same through the year

Tighter standards and weaker demand were reported by bankers for both commercial and consumer loans over the course of the second quarter, the Federal Reserve said in a report Monday.

And it looks to bankers as if that trend will continue through the rest of the year, the report stated.

According to the July 2023 Senior Loan Officer Opinion Survey on Bank Lending Practices (referred to as the “SLOOS” by the Fed), which gauges changes in the standards, terms and demand for bank loans over three months (corresponding mostly to the second quarter), tighter standards and weaker demand were reported for most loans.

Those conditions included commercial and industrial (C&I) loans to firms of all sizes and for all commercial real estate (CRE) loan categories, the report stated.

Loans to households saw the same circumstances, according to the report. That includes all categories of residential real estate (RRE) loans, especially for those other than government-sponsored enterprise (GSE)-eligible and government loans. Home equity lines of credit (HELOCs) were also affected by the tighter standards and lower demand.

Most other consumer loan categories shared the trend – except for credit card loans. Demand weakened for auto and other consumer loans, the Fed report asserted, while demand remained basically unchanged for credit card loans.

The SLOOS also asked banks to look forward to the second half of 2023; the bankers reported they expect to further tighten standards on all loan categories.

“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,” the report stated.

The SLOOS is completed by one or more senior loan officers at selected banks, up to six times a year, the Fed noted. It includes lending officers from up to 80 large domestically chartered commercial banks and up to 24 large U.S. branches and agencies of foreign banks. The purpose of the survey is to provide qualitative and limited quantitative information on bank credit availability and loan demand, as well as on evolving developments and lending practices in the U.S. loan markets, according to the Fed.

Senior Loan Officer Opinion Survey on Bank Lending Practices