Banks Tighten Lending Following Rate Hikes

May 22, 2023
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Stephanie Bedard-Chateauneuf
Borrowing money was already challenging for businesses and people early this year, but with the failure of three US regional banks and a series of rate hikes by the Federal Reserve, it has become far more onerous.

Borrowing money was already challenging for businesses and people early this year, but with the failure of three US regional banks and a series of rate hikes by the Federal Reserve, it has become far more onerous.

According to the Federal Reserve's quarterly Senior Loan Officer Opinion Survey (SLOOS), issued Monday, more lenders have tightened their requirements in the face of increased turbulence in the banking sector.

The Federal Reserve meeting's key takeaways

According to the Fed report, survey respondents attributed lending requirements changes to economic uncertainty, a reduced appetite for risk, collateral value declines, and concerns about banks' funding costs and liquidity. Due to these difficulties and consumer withdrawals, lenders expect to tighten standards across all loan categories for the rest of the year.

When banks tighten their rules, loans can become harder to get or have more onerous terms, making it harder for enterprises to make capital investments, recruit new staff, or buy or lease a car, or make home improvements.

The report usually doesn't get much attention from the public; however, that's not the case now, after three significant regional banks failed within four weeks and the Fed is attempting a perilous "soft landing" — bringing down inflation without causing unemployment to skyrocket.

The Fed surveyed up to 80 large US banks and 24 domestic branches of foreign banks, asking officials on lending terms and standards changes, as well as household demand for loans.

Banks are under pressure

The most recent SLOOS, released in January and usually related to activities in the fourth quarter of 2022, revealed that requirements for most business loans, particularly commercial real estate products, tightened.

Residential lending standards tightened, but demand for consumer-specific categories such as credit cards, automobiles, and personal loans declined.

Banks predicted the trend of tighter credit, declining demand, and poor loan quality to continue.

Then, in March, two regional banks failed in a row. The Fed, Treasury, and Federal Deposit Insurance Corporation moved in to shore up the banking system and prevent future bank runs; but, uncertainty about potential ripple effects inside the banking industry and the economy increased.

According to a separate assessment released Monday by the Federal Reserve Bank of New York, the effects on consumers have been variable.

This month's poll didn't reflect March's sharp drop in perceived loan access and availability. In April, the share of households saying that credit is easier and harder declined.

Household income growth predictions dipped little, but spending growth expectations declined dramatically. The lowest level since September 2021. Analysts say the latest federal consumer expenditure snapshots show "retrenching" or a return to more normal spending patterns.

Fed President: The central bank should assess the consequences

In an interview with Yahoo! Finance on Monday, Federal Reserve Bank of Chicago President Austan Goolsbee stated that "the credit crunch, or at least a credit squeeze, is beginning" and that it should be something Fed policymakers strongly consider when choosing interest rates.

Fed officials, including Chair Powell, have previously stated that credit tightening may have the same effect as a rate increase.

Separately, the Fed published its semi-annual Financial Stability Report on Monday, which evaluates the robustness of the US financial system.

Since the previous stability report in November, ongoing banking pressures have escalated into a "salient risk." According to the research, other concerns include prolonged inflation, monetary tightening, US-China tensions, commercial and residential real estate, and Russia's war in Ukraine.

Credit tightening poses dangers to the economy, Treasury Secretary Janet Yellen warned CNBC in an interview on Monday. She does, however, feel a soft landing is still conceivable.