Investing.com - Banks have been tightening lending standards for businesses and households in the first quarter, with plans to continue this trend throughout the rest of 2023, which could negatively impact US economic growth. This information comes from a recent Federal Reserve quarterly survey involving senior loan officers.
This widely-followed survey shows that challenges within the banking industry may pose risks to US economic growth. The Federal Reserve also released a separate report on Monday emphasizing that broader credit contraction presents near-term risks to the financial system.
A significant reduction in credit availability would increase funding costs for both businesses and households, potentially leading to an overall slowdown in economic activity. Banks started implementing stricter lending standards even before issues arose during Q1, including three sizable lenders' failures and massive deposit outflows. According to the new survey conducted among senior loan officers, these restrictions are expected to last throughout much of this year.
The surveyed bank officers revealed that demand for new loans weakened during Q1 across various sectors such as commercial and residential real estate, commercial and industrial operations, and auto lending - marking its lowest point since 2009 for commercial loans.
Experts at Oxford Economics stated that consequences from previous banking crises will manifest over time. They added that banks plan on further tightening their standards throughout this year regardless of size or scope.
Several factors contribute towards banks maintaining tighter lending policies through 2023; these include deteriorating loan portfolio quality alongside collateral values decline, shrinking risk tolerance levels coupled with deposit outflows concerns about bank funding liquidity
Between early March until late April alone saw a staggering $521 billion decrease in deposit balances at U.S. commercial banks based on Federal Reserve data analysis findings
However despite setbacks faced by lenders not all hope is lost when it comes down financing opportunities still available companies looking expand their business ventures or make necessary purchases needed for growth
Commercial loans leases remain on the rise across all banks, albeit at a slower rate than before. Federal Reserve Chair Jerome Powell acknowledged this trend during a recent press conference, stating that lending has persisted but slowed since late last year.
The possibility of tighter lending conditions is becoming increasingly prominent among numerous businesses. In fact, first-quarter earnings calls saw mentions of "tighter lending" triple compared to previous periods, with financial and real estate sectors discussing it the most.
One area under particular scrutiny is commercial real estate, which relies heavily on US bank funding. The concern lies in whether borrowers would be forced to refinance properties like office buildings or shopping centers at higher rates - an outcome that could trigger widespread defaults within the country.
In its Financial Stability Report released Monday, the Federal Reserve cautioned that any significant decline in commercial property prices might result in credit losses for banks exposed heavily to this sector. Banks currently hold approximately 60% of commercial real estate loans; hence any substantial correction concerning property values may have severe consequences for lenders and overall economic stability