The unrest at mid-sized institutions has caused banks to tighten lending standards to households and businesses, which may pose a threat to US economic growth, the Federal Reserve said in a report on Monday.
The quarterly poll of the Fed’s chief lending officer said requirements tightened for commercial and industrial loans, as well as for many household debt instruments such as mortgages, home equity lines of credit and credit cards.
Lending officials also said they expect difficulties to persist next year, largely due to lowered expectations for economic growth, as well as concerns about deposit outflows and reduced risk tolerance.
Asked about their expectations for next year, respondents gave a rather gloomy outlook for what lies ahead.
“Banks have announced that they expect standards to tighten across all credit categories,” the report said. “Banks most often cited the expected deterioration in the credit quality of their loan portfolios and the value of client collateral, a reduction in risk tolerance and concerns about bank funding costs, bank liquidity and deposit outflows as reasons for expecting a tightening of lending. standards for the rest of 2023.”
At the same time, the survey showed that demand weakened in most categories.
In particular, the report showed “tighter standards and weaker demand” for commercial and industrial credit, an important driver of economic growth. These conditions were observed in all sizes of enterprises.
The report also showed equal conditions across commercial property categories.
The survey was closely watched on Wall Street to gauge the impact of problems in the banking sector that accelerated in early March.
That’s when Regulators shut down Silicon Valley Bank and Signature Bank after a deposit run caused by a loss of confidence that institutions will have the liquidity to meet their obligations.
Since, JPMorgan has took over the First Republic Bank after similar problems in that company and UBS bought by a rival Credit Suisse after the latter needed bailing out.
Despite the banking troubles, the central bank made a decision last week raise interest rates for the tenth time from March 2022. Policymakers have already seen the SLOOS report ahead of the end of the session on Wednesday, and Fed Chair Jerome Powell the conditions listed are about as expected given what has happened in the sector.
“SLOOS is fundamentally consistent when you see it with how we and others think about the situation and what we see from other sources,” Powell told reporters. “The bank data will show that lending continues to grow, but the pace has actually been slowing since the second half of last year.”
At the March meeting Fed economists have warned that a shallow recession is likely later in the year due to the tightening of standards resulting from the banking problems.