Banks expect to tighten loan standards for rest of 2023: Fed
Banks tightened their lending standards for businesses and households in the second quarter and expect that to continue for the rest of 2023, according to a survey of loan officers conducted by the Federal Reserve.
The bank officers cited a variety of reasons for the tightening, including an uncertain economic outlook, deteriorating credit quality of their loan portfolios and concerns about bank funding costs as well as deposit outflows.
“The overall picture is of tight and tightening lending conditions,” Federal Reserve Chairman Jerome Powell said last week about the survey, after the Fed decided to raise interest rates to their highest level since March 2001.
Bank officers also attributed some of their tightening to increased concerns about the effects of legislative, supervisory, or accounting changes.
Last week the Fed and other regulators unveiled a proposal that would increase capital requirements for banks with $100 billion or more in assets by an aggregate of 16%, as part of an effort to cushion lenders against potential future blowups.
Some banks are pulling back on lending in anticipation of the new rules, or warning that they may restrict lending in the future.
The survey also made it clear that demand for new loans is weakening across a variety of categories, from consumers and businesses to commercial and residential real estate.
Growth in US bank lending has been slowing since the beginning of this year as the Fed ramped up an aggressive campaign to bring down inflation by hiking interest rates, driving up the the cost of borrowing. Banks are also setting aside more for future loan losses, a sign they expect credit conditions to worsen.
"When I narrowly look at the lending outlook from here we continue to expect reasonably robust loan card growth, maybe a little in auto," JPMorgan Chase (JPM) CFO Jeremy Barnum said earlier this month.
"Away from that, for a variety of different reasons both in consumer and in wealth, we actually don't expect a lot of loan demand," Barnum added.
Slowing bank lending can serve as a recession indicator though it isn't always a clear one.
The "maximum negative impact" of tighter credit conditions on gross domestic product can take a year and a half, according to Apollo chief economist Torsten Slok. (Apollo is Yahoo Finance's parent company).
But the Fed is no longer forecasting a recession in 2023.
Data released from the Bureau of Labor Statistics last week also showed the US economy grew at a faster pace in the second quarter than the first, which added to a growing viewpoint that the threat of a recession in the immediate future is fading.
"We're seeing a strong economy, and it's made us confident," Powell added last week.
Click here for the latest stock market news and in-depth analysis, including events that move stocks
Read the latest financial and business news from Yahoo Finance
