Loan Officers Expect to Tighten Credit Standards on C&I Loans, Fed Survey - News - ABL Advisor

The July 2022 Senior Loan Officer Opinion Survey on Bank Lending Practices addressed changes in the standards and terms on, and demand for, bank loans to businesses and households over the past three months, which generally correspond to the second quarter of 2022.1

Regarding loans to businesses, survey respondents reported, on balance, tighter standards and stronger demand for commercial and industrial (C&I) loans to firms of all sizes over the second quarter. Meanwhile, banks reported tighter standards and weaker demand for most commercial real estate (CRE) loan categories, except for those secured by multifamily residential properties, for which demand strengthened on net.

For loans to households, banks reported unchanged standards for most categories of residential real estate (RRE) loans and weaker demand for all such loans. In addition, banks reported tighter standards and stronger demand for home equity lines of credit (HELOCs). Standards also remained unchanged for all consumer loan categories—that is, credit card loans, auto loans, and other consumer loans—while demand weakened for auto loans and strengthened for credit card and other consumer loans.

The survey included a set of special questions inquiring about the current level of lending standards relative to the midpoint of the range over which banks’ standards have varied since 2005. Banks reported that, on balance, their lending standards for most C&I loans and consumer loans to prime borrowers are currently at the easier end of the range of standards since 2005. For subprime consumer loans and most categories of CRE loans, banks reported currently having relatively tighter levels of lending standards on net. Meanwhile, banks reported levels to be in the midpoint of the range of standards since 2005 for most RRE loans. Compared with the July 2021 survey, the net share of banks reporting that levels were at the tight end of their historical range in July 2022 was higher for most C&I and CRE loan categories and lower for all RRE and consumer loan categories.

The survey also included an additional set of special questions inquiring about banks’ expectations for changes in lending standards over the second half of 2022. Banks, on balance, reported expecting lending standards to tighten across all loan categories.

Lending to Businesses

Questions on commercial and industrial lending. Over the second quarter, significant net shares of banks reported having tightened standards on C&I loans to firms of all sizes, after several quarters of continued easing last year and unchanged standards in the previous quarter. Banks also reported having tightened most queried terms on C&I loans to firms of all sizes over the second quarter. Tightening was most widely reported for premiums charged on riskier loans, with a significant net share of banks reporting having tightened this term for loans to large and middle-market firms, and a moderate net share of banks reporting having tightened this term for small firms. In addition, moderate net shares of banks reported having increased costs of credit lines and widening the spreads of loan rates over the cost of funds to both large and middle-market firms and to small firms. A moderate net share of banks also reported increased collateralization requirements for large- and middle market firms. Other queried C&I loan terms were either eased by a modest share of banks or remained basically unchanged on net. Meanwhile, a moderate net share of foreign banks reported having tightened standards on C&I loans.

Major net shares of banks that reported having tightened standards or terms cited a less favorable or more uncertain economic outlook, the worsening of industry-specific problems, and reduced tolerance for risk as important reasons for doing so. Significant net shares of banks also cited decreased liquidity in the secondary market for C&I loans, increased concerns about the effects of legislative changes, supervisory actions, or changes in accounting standards, and less aggressive competition from other banks or nonbank lenders as important reasons for tightening lending standards and terms.

Regarding demand for C&I loans over the second quarter, a significant net share of banks reported stronger demand for loans from large and middle-market firms and a moderate net share of banks reported stronger demand from small firms. However, banks reported basically no changes in the number of inquiries from potential borrowers regarding the availability and terms of new credit lines or increases in existing lines. In addition, a significant net share of foreign banks reported that C&I loan demand was stronger over the second quarter.

Among the most cited reasons for strengthening demand, major net shares of banks cited increased customer needs to finance inventory and accounts receivable, increased precautionary demand for cash and liquidity, as well as a shift in customer borrowing from other bank or nonbank sources.

Questions on commercial real estate lending. Over the second quarter, a significant net share of banks reported having tightened standards for all CRE loan categories. Meanwhile, moderate net shares of banks reported weaker demand for construction and land development loans and for nonfarm nonresidential loans, and a modest net share of banks reported stronger demand for loans secured by multifamily properties. Furthermore, a significant net share of foreign banks reported tighter standards for CRE loans, on net, while a modest net share of foreign banks reported weaker demand for such loans.

Lending to Households

Questions on residential real estate lending. Over the second quarter, banks reported unchanged or tighter lending standards for most RRE loan types and HELOCs. Banks, on net, reported basically unchanged standards for the following types of mortgages: government-sponsored enterprise (GSE)-eligible; government; qualified mortgage (QM) non-jumbo, non-GSE-eligible; and non-QM jumbo residential. A moderate net share of banks tightened standards for subprime residential mortgages, while modest net shares of banks tightened standards for QM jumbo and non-QM non-jumbo residential mortgages, as well as for HELOCs.

Meanwhile, major net shares of banks reported weaker demand for all RRE loans over the second quarter, except for HELOCs, for which a significant net share of banks reported stronger demand.

Questions on consumer lending. Over the second quarter, lending standards for all consumer loan categories—that is, credit card loans, auto loans, and other consumer loans—remained basically unchanged. Consistent with unchanged standards for credit card loans, banks also reported most queried terms on credit card loans remained unchanged. As the only exception, a modest net share of banks reported having increased (that is eased) credit limits. Banks also reported, on net, leaving most terms on auto loans and other consumer loans unchanged. As exceptions, modest net shares of banks reported an increase (that is tightening) in the minimum percent of outstanding balances required to be repaid each month for both auto loans and other consumer loans.

Regarding demand for consumer loans, moderate and modest net shares of banks reported stronger demand for credit card loans and other consumer loans, respectively, while moderate net shares of banks reported weaker demand for auto loans over the second quarter.

Special Questions on Current Level of Banks’ Lending Standards

As with all July surveys since 2011, the July 2022 survey included a set of special questions that asked respondents to describe the current levels of lending standards at their bank. Specifically, respondents were asked to consider the range over which their lending standards have varied since 2005 and to report where the level of standards currently is relative to the midpoint of that range.

For C&I loans, banks reported levels of standards that were easier, on net, than the midpoints of their historical ranges for most C&I loan categories, except for syndicated or club loans to below-investment-grade firms, for which levels were near the midpoint of their historical range. The net share of banks reporting that levels were at the tight end of the range was slightly higher in the July 2022 survey than in the July 2021 survey for almost all C&I loan categories, except for C&I loans to very small firms, for which reported levels were similar in the two surveys.

Among foreign banks, C&I loan standards were reported to be tighter than the midpoints of their historical ranges for all categories. The net shares of banks reporting standards on the tighter end of their ranges increased since 2021 for syndicated or club loans to investment grade and below-investment-grade firms and decreased since 2021 for non-syndicated loans to small firms. Meanwhile, reported levels were similar across the two surveys for non-syndicated loans to large and middle-market firms.

For CRE loans, banks reported standards that were tighter than the midpoints of their historical ranges for construction and land development loans and nonfarm nonresidential loans, and standards that were near the midpoint of the range for multifamily loans. The net shares of banks reporting standards on the tighter end of their ranges increased since 2021 for construction and land development loans and nonfarm nonresidential loans and remained basically unchanged for multifamily loans.

Regarding RRE loans, modest and moderate net shares of banks reported that lending standards for jumbo mortgages and HELOCs were on the tighter ends of their ranges, respectively. For GSE-eligible and government residential mortgages, banks reported levels of standards to be near the midpoint of their historical range. The net share of banks reporting that levels were at the tight end of the range was lower in the July 2022 survey than in the July 2021 survey for all RRE loan categories.

Regarding consumer loans, standards for prime auto and credit card loans were on the easier ends of their historical ranges, while standards for subprime auto and credit card loans were on the tighter ends of their respective ranges. The net share of banks reporting that levels were at the tighter end of the range was lower in the July 2022 survey than in the July 2021 survey for all consumer loan categories.

Overall, responses to the July 2021 and 2022 surveys indicate that banks’ lending standards have tightened since 2021 for C&I and CRE loans but have eased since 2021 for RRE and consumer loans.

Special Questions on Banks’ Outlook for the Second Half of 2022

The July survey also included a set of special questions inquiring about banks’ expectations for changes in lending standards over the second half of 2022, assuming that economic activity would evolve in line with consensus forecasts.

On balance, banks reported expecting to tighten lending standards across all loan categories. Specifically, major net shares of banks expected to tighten standards for C&I loans to firms of all sizes; a significant net share of banks expected to tighten standards for nonconforming jumbo residential mortgage loans; moderate net shares of banks expected to tighten standards for credit card loans and auto loans; and a modest net share of banks expected to tighten standards for GSE-eligible residential mortgage loans.

The most cited reasons for expecting to tighten standards over the second half of 2022, all cited by major net shares of banks, were an expected deterioration in borrowers’ debt-servicing capacity due to higher inflation or inflation risk, an expected deterioration in collateral values, an expected deterioration in the credit quality of loan portfolios, an expected reduction in risk tolerance, and an expected increase in the exposure to interest rate risk due to higher inflation or inflation risk. Furthermore, significant net shares of banks also cited increased concerns about the effects of legislative or regulatory changes and an expected reduction in the ease of selling loans in the secondary market.

This document was prepared by Carlo Wix, with the assistance of Andrew Castro and Ria Sonawane, Division of Monetary Affairs, Board of Governors of the Federal Reserve System.

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