Lending Standards Tighten Further As Demand Collapses, Banks Fret

The most anticipated senior loan officer opinion survey in recent memory showed the share of US banks tightening C&I loan standards to large and middle-market firms rose to levels only witnessed during recessions.

I don’t know if we’re supposed to shudder at that or sell stocks or buy bonds or what, exactly.

Headed into this week, there was all manner of speculation about what the “SLOOS” would say. The survey was supposed to reveal something profound about what many observers insist is a burgeoning credit crunch destined to amplify the economic drag from 500bps of Fed hikes.

I’ll leave it to readers to decide if the survey lived up to the hype. Certainly, the results suggested banks continued to adopt a cautious approach in light of macro concerns and recent developments at regional lenders.

All CRE loan categories were subjected to tighter standards and saw weaker demand. Mid-size banks were the most stringent.

“The most frequently reported changes pertain[ed] to wider spreads of loan rates over banks’ cost of funds and lower loan-to-value ratios,” the Fed said. So, exactly what you’d expect given everything that’s been written about the dour outlook for CRE.

Notably, the net percentage of banks tightening standards for CRE loans tied to multifamily construction hit a record, at 64.5%.

On the consumer side, the picture was mixed. A bigger net share of large banks tightened standards for credit cards, and “almost all queried terms on credit card loans” were tightened. The same was true for auto and other consumer loans.

Demand was broadly weak, and particularly for loans to businesses. “Major net shares of banks reported weaker demand for [C&I] loans from firms of all sizes,” the Fed noted. The same was true in CRE: Tighter standards, weaker demand.

The visual suggests a recession. I’m not sure there’s much utility in dancing around the point. You could argue the most important takeaway from the survey is the collapse in demand, not the incremental tightening.

“With the Conference Board measure of US CEO confidence and the NFIB small business optimism survey both at recession levels, these borrowing intention numbers highlight the defensive mindset in America right now that points to less capex and hiring in coming months,” ING’s James Knightley remarked.

Banks indicated that standards will either stay tight or get tighter going forward for C&I, CRE, nonconforming jumbo mortgages and “all consumer loan categories.”

In explaining those expectations, large banks cited anticipated “deterioration in credit quality, collateral values and reduction in risk tolerance.” In this vintage of the survey, the Fed distinguished between the largest banks and mid-sized lenders, with the latter defined as those with between $50 billion and $250 billion in assets.

Mid-sized and “other” banks shared the worries of the country’s largest lenders, but listed additional concerns too. “Other” banks cited funding costs, liquidity position and deposit outflows. Mid-sized respondents cited the same misgivings and impediments, plus a few others, including “increased concerns about the effects of future legislative changes [and] supervisory actions.”


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3 thoughts on “Lending Standards Tighten Further As Demand Collapses, Banks Fret

  1. Listening to the conference calls of BDCs, a new theme has emerged. In 4Q22, the theme was, “Banks have backed off from originating loans, so we’re able to charge much wider spreads on already elevated interest rates, this is great!” In Q1 though, the theme became, “While we’re still able to charge huge spreads, people just aren’t doing deals.” New loan origination is distinctly down. At the same time, loans are clocking in with yields over 13%. That’s a hell of a hurdle rate for any business to clear in justifying new spending, especially considering widespread forecasts for an economic slowdown.

  2. I’m guessing financial conditions are going to tighten a lot further,
    “To further assess the vulnerability of the US banking system to uninsured depositors run, we plot the 10 largest banks at the risk of a run, which we define as a negative insured deposit coverage ratio if all uninsured depositors run…Because of the caveats in our analysis as well as the potential of exacerbating their situation, we anonymize their names, but we also plot SVB [Silicon Valley Bank which failed on March 10] as comparison. We plot their mark-to-market asset losses (Y axis) against their uninsured deposits as a share of marked to market assets. Some of these banks have low uninsured deposits, but large losses, but the majority of these banks have over 50% of their assets funding with uninsured deposits. SVB stands out towards the top right corner, with both large losses, as well as large uninsured deposits funding. As Figure 5 shows [see below], the risk of run does not only apply to smaller banks. Out of the 10 largest insolvent banks, 1 has assets above $1 Trillion, 3 have assets between $200 Billion and $1 Trillion, 3 have assets between $100 Billion and $200 Billion and the remaining 3 have assets between $50 Billion and $100 Billion.”

  3. We’re also being led to believe that the largest banks are rock solid and have been increasing their deposits through all this banking trouble, apparently not…
    Since the banking crisis began making headlines at expensive media real estate, the narrative has been that deposits are fleeing the small commercial banks and flooding into the biggest banks that are perceived as too-big-to-fail and thus offer a safer venue for deposits.

    Because these mega banks are the same ones that the Fed has been bailing out since the financial crisis of 2008, that narrative requires believing that our fellow Americans are dumber than a stump.

    We decided to check out that narrative for ourselves. Not only is that scenario wrong, but it is so decidedly wrong, and it’s so easy to get the accurate figures, that from where we sit it looks like there might have been an agenda by someone to harm smaller banks. (Since it’s short sellers who have benefited to the tune of more than $7 billion from this misinformation, the Securities and Exchange Commission should find out who the public relations firms are who placed this erroneous information, and who paid them.)

    Each Friday, at approximately 4:15 p.m., the Federal Reserve (“the Fed”) releases its H.8 report showing the assets and liabilities of commercial banks in the United States. Monthly deposit data is included going back one year, as well as deposit data for each of the last four weeks. Data is also broken down by the 25 largest banks and the approximate 4,000 small banks. Equally helpful, the folks at the St. Louis Fed make it possible to chart much of that H.8 data via its FRED charting tools. (See charts above and below.) The 25 largest banks in the U.S. lost a total of $644 billion in deposits between April 27, 2022 and April 26, 2023.

    The three largest banks in the U.S., as measured by deposits, are JPMorgan Chase, Bank of America and Wells Fargo. Between April 27, 2022 and April 26, 2023, JPMorgan Chase lost $184 billion in deposits; Bank of America lost $162 billion; and Wells Fargo lost $118.7 billion, for a combined loss in deposits of $464.7 billion — representing 72 percent of the decline in deposits at the 25 largest banks.

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