Bank lending standards ease slightly

February 6, 2024

The Federal Reserve’s Senior Loan Officer Opinion Survey (SLOOS) showed banks continued with restrictive lending standards for households and businesses in the fourth quarter though they were somewhat less tight than before. There was discernible improvement in banks’ attitudes towards business loans, with the exception of commercial real estate, while consumer lending showed more modest improvement.

For households, 23% of banks tightened their standards for consumer credit cards, a marginal improvement from 29% in the third quarter. For residential real estate loans, 10% of banks reported they would tighten standards versus 16% in the prior quarter. Still, demand for residential mortgage loans remained suppressed as half of banks cited weak demand. This was little changed from 55% that reported poor demand in the third quarter. For auto loans, 6% of banks tightened standards in the fourth quarter versus 15% during the prior two quarters.

In response to a special question asked in the January 2024 SLOOS, banks reported expecting to tighten standards for credit cards while standards for residential real estate loans were expected to be little changed. An upside surprise could be in store for the latter sector as we have seen the housing market show sensitivity to the level of mortgage rates. Now that mortgage rates are back below 7%, we have seen signs of a pickup in housing activity.

For businesses, 15% 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 a notable improvement from 50% of banks tightening their standards around the middle of last year. For C&I loans to small businesses (annual sales of under $50 million), 19% of banks tightened standards, vs 30% in the third quarter.

The one area that continues to show significant restraint is commercial real estate (CRE) lending. A major share of banks, 41%, tightened standards for CRE loans in the first quarter versus 66% in the fourth quarter. Tightening was more widely reported by regional banks than by large banks. Weak loan demand was reported for multifamily properties, nonfarm nonresidential properties and construction and land development.

In response to special questions, banks reported expecting to tighten CRE standards in 2024. The most frequently cited reasons for banks to tighten lending standards were an expected deterioration in collateral values, a less favorable economic outlook and an expected deterioration in credit quality of the bank’s loan portfolio.

Aside from the challenges facing the economy, there are some signs for optimism. From the special question responses, loan demand over the course of 2024 was projected to strengthen across residential real estate, C&I loans to firms of all sizes, credit cards and even CRE. The most cited reason for stronger loan demand was an expected decline in interest rates. Other reasons included higher customer spending or investment needs, an expected shift of customers from other banks and nonbanks and an expected decrease in precautionary demand for cash and liquidity.