Banks Report Tighter Standards, Lower Demand for Lending in Q4

Banks tightened their standards on loans to both businesses and households in the fourth quarter.

They also saw lower demand for lending during that period, the Federal Reserve reported Monday (Feb. 5).

“While banks, on balance, reported having tightened lending standards further for most loan categories in the fourth quarter, lower net shares of banks reported tightening lending standards than in the third quarter across all loan categories,” the Federal Reserve said in its January 2024 Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS).

Regarding loans for businesses, banks reported tighter standards and weaker demand for both commercial and industrial (C&I) loans and commercial real estate (CRE) loans, according to the report.

“Major net shares of banks that reported having tightened standards or terms on C&I loans cited a less favorable or more uncertain economic outlook, a reduced tolerance for risk, less aggressive competition from banks or nonbank lenders, and deterioration in their current or expected liquidity position as important reasons for doing so,” the Federal Reserve said.

As for loans to households, banks reported tighter standards and weaker demand for most categories of residential real estate (RRE) loans, home equity lines of credit (HELOCs), and credit card, auto and other consumer loans, the report said.

Among the exceptions were government residential mortgages and government-sponsored enterprise (GSE)-eligible residential mortgages. For these RRE loans, standards were basically unchanged during the quarter, per the report.

Looking ahead through the full year 2024, banks expect lending standards to remain basically unchanged for C&I and RRE loans while continuing to tighten for for CRE, credit card and auto loans, according to the report.

Banks also expect all loan categories to see stronger loan demand during the year, while most loan types will see deteriorating loan quality, as measured by delinquencies and charge-offs, the report said.

Recent earnings from the likes of Capital One, Synchrony and Discover Financial have given evidence of rising delinquency rates and slowing payment volumes, PYMNTS reported Tuesday (Jan. 30).

In commercial lending, big banks reported that firms are drawing down deposits, and loan losses are creeping up, though from low levels.