Federal Reserve Survey Reveals Tightened Lending Standards and Weaker Demand

Lending standards have tightened and demand has weakened in the third quarter of 2023, according to the Federal Reserve’s October Senior Loan Officer Opinion Survey (SLOOS) on Bank Lending Practices, released Monday (Nov. 6).

The survey showed that lending standards have tightened across various loan categories, including loans to businesses and households. This tightening is attributed to factors such as the uncertain economic outlook, reduced risk tolerance, deterioration in loan credit quality and collateral values, and concerns about funding costs.

For loans to businesses, the survey showed that lending standards have tightened and there is weaker demand for commercial and industrial loans to firms of all sizes. Similarly, tighter standards and weaker demand prevail for all commercial real estate loan categories. The study echoed the previous quarter’s report, which showed banks tightening lending criteria.

On the consumer side, lending across all categories of residential real estate loans, except for government residential mortgages, has tightened. Lending standards for government-sponsored enterprise (GSE) mortgages, however, remain largely unchanged. Additionally, demand has weakened across all residential real estate loan categories, including home equity lines of credit. The survey further indicated that credit card, auto and other consumer loans have seen tighter standards and weaker demand as well.

Banks have reported being less likely to approve credit card and auto loan applications for borrowers with FICO scores ranging from 620 to 680 compared to the beginning of the year. Conversely, they are more likely to approve credit card loan applications and equally likely to approve auto loan applications for borrowers with FICO scores of 720 over the same period.

The tightening of lending standards and weakening demand observed in the October SLOOS reflects the cautious approach of banks in response to the prevailing economic conditions. The uncertain economic outlook, reduced risk tolerance, and concerns about credit quality and collateral values have led banks to adopt more stringent lending standards. Furthermore, weaker demand for loans across various categories suggests that businesses and consumers are becoming more cautious in their borrowing activities.

The tightening of lending standards and weakening demand in the lending market can have significant implications for the overall economy. When lending standards tighten, it becomes more difficult for businesses and individuals to access credit, which can hinder investment, expansion, and consumption. Additionally, weaker demand for loans may indicate a slowdown in economic activity, as businesses and consumers may be less inclined to borrow for investment or spending purposes.