Evening Brief – 05.09.23
The April Senior Loan Officer Opinion Survey on Bank Lending Practices released Monday was more nuanced than some headlines suggested. For commercial and industrial loans, commercial real estate loans, residential real estate loans, except for GSE-eligible loans and government residential mortgages, which make up most loans, home equity lines of credit, and all consumer loan categories excluding credit cards, bank respondents reported tighter standards and weaker demand in the first quarter.
And while demand for other loan types, including credit cards, auto loans, and jumbo mortgages, unexpectedly increased, one could argue that the data shows a sudden shock for businesses, who are delaying borrowing and consequent growth until there is more stability.
The survey included questions inquiring about banks’ changes in lending policies for CRE loans over the past year; the reasons why banks changed standards for all loan categories over the first quarter; and banks’ expectations for changes in lending standards over the rest of 2023 and reasons for the changes.
Banks reported tightening terms on all categories of CRE loans, which is not surprising. Additionally, large percentages of banks reduced the maximum loan size and market areas covered, suggesting that demand for loans will continue to decline.
Banks gave the following reasons in response to the second question: a less rosy or unclear economic outlook; decreased risk tolerance; a decline in the value of the collateral; and worries about the funding costs and liquidity positions of the banks.
In response to the final question, banks stated they anticipated tighter standards for all loan types. Banks typically cited a reduction in risk tolerance, a projected decline in the credit quality of their loan portfolios and in the collateral values of their customers, as well as worries about funding costs, bank liquidity and deposit withdrawals.
The credit crunch may only be getting started, even though the poll results may not have been as terrible as some had anticipated. All of this is predicated on the premise that there won’t be any additional bank failures, which is a major assumption given that the Fed is continuing QT and reducing the deposit base, especially from small banks, by around $95 billion each month (the pace of QT).