It was already difficult for businesses and households to borrow money earlier this year — but after the collapse of three US regional banks and a cascade of rate hikes by the Federal Reserve, getting money has become a little harder.
More lenders have stiffened their standards in the wake of increasing turmoil within the banking sector, according to the Federal Reserve's quarterly Senior Loan Officer Opinion Survey (SLOOS) released Monday.
Survey respondents attributed the changes in lending standards to economic uncertainty, a reduced appetite for risk, deterioration in collateral values and broader concerns about banks' funding costs and liquidity positions, according to the Fed report. Additionally, lenders reported that they expect to tighten standards across all loan categories for the remainder of this year, citing the above concerns as well as customer withdrawals.
"Further evidence of tightening lending conditions and a potential credit crunch can be seen in the notable decline in demand for credit by large and middle market firms inside the [SLOOS]," Joseph Brusuelas, chief economist with RSM US, said in a statement. "Policymakers and investors should anticipate this to impact the real economy in the near term as investment, hiring and growth slow on the back of tighter lending."
When banks tighten their standards, loans can be harder to get or come with more onerous terms, making it difficult for businesses to make capital improvements or hire staff; or for consumers to buy a house, purchase or lease a car or make home improvements.
The report doesn't typically garner a lot of attention from the public; however, that's not the case now, after three large regional banks failed within a four-week span and the Fed is attempting a precarious "soft landing" — to bring down inflation without causing a ballooning in unemployment.
The Fed surveys up to 80 large US banks and 24 domestic branches of foreign banks and asks officers about topics such as changes in lending terms and standards as well as household demand for loans.
The last SLOOS, released in January and generally corresponding to activity in the fourth quarter of 2022, showed that standards tightened for most business loans, especially commercial real estate products.
Standards tightened and demand weakened for residential loans as well as consumer-specific categories such as credit cards, autos and personal loans.
At the time, banks expected that trend of tightening credit, waning demand and deteriorating loan quality would continue.
This story is developing and will be updated.