Banks tightened lending standards for businesses and households during the first quarter and expect to keep tightening for the rest of 2023, according to the Federal Reserve's quarterly survey of senior loan officers.
The widely-followed survey is the latest sign of how challenges in the banking industry could pose a threat to US economic growth.
In fact, the Fed in a separate report released Monday highlighted a broader contraction in credit as a near-term risk to the financial system.
"A sharp contraction in the availability of credit would drive up the cost of funding for businesses and households, potentially resulting in a slowdown in economic activity," it said in its semi-annual Financial Stability Report.
Banks had been tightening standards before turmoil of the first quarter, which resulted in the failure of three sizable lenders and outflows of hundreds of billions in deposits. The new survey of senior loan officers released Monday confirms the squeeze on credit availability persisted — and is expected to linger for much of the year.
Bank officers also told the Fed that demand for new loans weakened in the first quarter, particularly for commercial and residential real estate, commercial and industrial and auto lending. The demand was weakest for commercial loans since 2009.
"The effects of the banking panic will be felt over time," according to a note from analysts at Oxford Economics. "Large proportions of banks of all sizes plan to tighten standards further over the rest of the year."
Bank officers surveyed by the Fed cited a variety of reasons for the tightening they expect to last through 2023, including deteriorating credit quality of their loan portfolios and collateral values, a reduction of risk tolerance, deposits outflows and concerns about bank funding and liquidity.
Deposit balances at U.S. commercial banks have fallen by $521 billion between the beginning of March and the third week of April, according to Fed data.
Banks have not pulled back on lending entirely. Commercial loans and leases continue to rise at all banks, according to Fed data, although at a slowing pace.
“Lending has continued to grow, but the pace has been slowing really since the second half of last year,” Federal Reserve Chair Jerome Powell’s said last week shortly after the U.S. central bank announced another rate hike.
The worries about a credit crunch have become a hot topic across many companies. The use of the phrase “tighter lending” tripled during first-quarter earnings calls according to analysis from Bank of America.
Firms in the financial and real estate sectors mentioned the phrase the most. “If credit conditions tighten further, a deceleration in sales is likely,” the analysts noted.
One sector under close scrutiny is commercial real estate, which relies heavily on US banks for funding. The fear is if borrowers are forced to refinance office towers or shopping centers at higher rates, it could cause a wave of defaults across the US.
The Federal Reserve warned Monday in its Financial Stability Report that a material decrease in commercial property prices could lead to credit losses for banks with sizable exposure to commercial real estate.
Banks hold about 60% of commercial real estate loans, according to the Fed. “The magnitude of a correction in property values could be sizable,” the report stated.
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