Banks Get Stricter On Loan Standards, Brace For Declines

The Federal Reserve revealed Monday (February 5) that an increasing number of banks have gotten stricter with the underwriting of some loans during the last quarter of 2018 and that they are bracing for loan demand and performance to decline.

According to a report in The Wall Street Journal, citing the Federal Reserve, the survey of senior loan officers conducted by the Federal Reserve for January revealed a growing number of banks expect a slowdown in loans to come in 2019. “Banks reported expecting to tighten standards for all categories of business loans as well as credit-card loans and jumbo mortgages,” the survey said, according to The Wall Street Journal. “Meanwhile, banks anticipate that loan performance will deteriorate for all surveyed categories.”

In order to tighten lending standards, banks can opt to charge higher interest rates, lower the size of credit lines or put in place more requirements. The report noted that the majority of banks made none of those changes when it comes to both consumer and business lending during the last three months of 2018.

Where the changes are largely happening is with construction and land development loans, with 16 percent of banks getting tougher in terms of credit standard. At the same time, only 3 percent of banks made it easier to get construction and land development loans. In the third quarter, 9 percent of banks got stricter with those loans while 3 percent made it easier. Of the banks surveyed 4 percent said they are seeing strong demand while one-fourth said demand was weaker during the fourth quarter of last year. Looking out to this year, one-fourth of the banks said they think the delinquency rate on loans and charge-off in construction, land development, commercial and industrial loans will increase.  On the consumer side, The Wall Street Journal reported that banks are increasingly saying they are seeing weaker demand for mortgages and consumer loans.


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