Bank lending standards ease in Q1

May 8, 2024

The Federal Reserve’s Senior Loan Officer Opinion Survey (SLOOS), in recent reports, showed banks’ lending standards for households and businesses moving away from peak restraint a year ago. The latest survey for the first quarter of 2024 revealed that progress has now stalled in certain areas, akin to what we are seeing with inflation.

For businesses, 16% of banks tightened their lending standards for commercial and industrial (C&I) loans to large and middle market firms (e.g., businesses with annual revenue of $50 million or more). That is little changed from 15% in the fourth quarter. For C&I loans to small businesses (annual sales of under $50 million), 20% of banks tightened standards, vs 19% in the fourth quarter. The reasons for maintaining tight lending standards were a less favorable or more uncertain economic outlook, a reduced tolerance for risk or worsening industry-specific problems.

Regarding business loan demand, conditions remained weak for firms of all sizes. About one quarter of respondents reported weak C&I demand in the first quarter, little changed from the fourth quarter. The most cited reasons for weaker demand were decreased customer financing needs for mergers and acquisitions, inventory or lower investment in plant or equipment.

The special question asked in the current survey pertained to commercial real estate (CRE). The Federal Reserve asked banks about changes in their credit policies for CRE loans over the past year.

Banks tightened all terms surveyed for each CRE loan type, finding 34% of banks tightened standards for approving new loan applications for multifamily properties versus 41% in the fourth quarter. For nonfarm, nonresidential properties, 31% tightened standards versus 42% in the fourth quarter.

The most reported change in terms was the widening of interest rate spreads on loans over the cost of funds. Other terms included the tightening of maximum loan sizes, lowering loan-to-value ratios, increasing debt service coverage ratios and shortening interest-only payment periods for all CRE loan types. Nearly all banks cited less favorable or more uncertain outlooks for CRE market rents, vacancy rates, and property prices for the tightening in standards.

Demand for loans secured by multifamily properties remained weak. Up to 34% reported weak demand for this loan type versus 50% in the fourth quarter. For nonfarm, nonresidential properties, 29% reported weak demand versus 53%.

The most cited reasons for weaker CRE loan demand were higher interest rates, a decrease in customer acquisition or development of properties and a less favorable or more uncertain customer outlook for rental demand.

For loans to households, residential real estate (RRE) showed improvement for both the demand and supply of loans. A reported 4% of banks tightened standards for RRE, an easing from 10% in the fourth quarter. For residential mortgages, 20% reported weaker demand in the first quarter. That was a notable improvement from 50% in the fourth quarter. Lower mortgage rates earlier in the year likely spurred housing demand.

For auto loans, 10% of banks tightened their standards, an increase from 6% in the fourth quarter. On the demand side, 26% of banks cited weaker auto loan demand, up from 17% in the fourth quarter. The average transaction price for a new vehicle is currently over $47,000. Add higher insurance premiums and higher vehicle maintenance costs, which give new meaning to the words "sticker shock."

All other consumer lending categories showed little change. For consumer credit cards, 21% of banks tightened their standards versus 23% in the fourth quarter. For home equity lines of credit, 12% tightened their standards versus 14%.