More banks tightening lending standards amid higher interest rates, Fed survey shows
Ark Invest CEO Cathie Wood gives an economic outlook ahead of the Federal Reserve's expected rate hike on 'Kudlow.'said Monday that more banks are tightening their lending standards in the wake of recent turmoil within the financial sector.
The share of banks tightening terms on commercial and industrial loans for medium and large businesses rose to 46%, up from 44.8% in the fourth quarter of 2022, according to the Fed's newest quarterly Senior Loan Officer Opinion Survey. "Banks reported expecting to tighten standards across all loan categories," the report said. "Banks most frequently cited an expected deterioration in the credit quality of their loan portfolios and in customers’ collateral values, a reduction in risk tolerance, and concerns about bank funding costs, bank liquidity position, and deposit outflows as reasons for expecting to tighten lending standards over the rest of 2023.
When credit conditions tighten, banks significantly raise their lending standards, making it difficult to acquire a loan. Borrowers may have to agree to more stringent terms like high interest rates as banks try to reduce the financial risk on their end. Fewer loans, in turn, would lead to less big-ticket spending by consumers and businesses.The report also pointed to a sharp slowdown in: The percentage of banks reporting stronger demand for commercial and industrial loans tumbled by 55.
"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 [survey]," said Joe Brusuelas, RSM chief economist. "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.
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