Fed Report Shows Banks Worried About Conditions Ahead, With Focus On Slowing Economy And Deposit Outflows

• Turmoil in mid-sized institutions caused banks to tighten lending standards both to households and businesses, potentially posing a threat to U.S. economic growth, according to a Federal Reserve report released on Monday. The Fed’s quarterly Senior Loan Officer Opinion survey said requirements got tougher for commercial and industrial loans as well as for many household-debt instruments such as mortgages, home equity lines of credit and credit cards.
• The loan officers further said they expect troubles to persist over the next year, owing largely to diminished expectations for economic growth as well as fears over deposit outflows and reduced risk tolerance.
• “Banks reported expecting to tighten standards across all loan categories,” the report said. “Banks most frequently cited an expected deterioration in the credit quality of their loan portfolios and in customers’ collateral values, a reduction in risk tolerance, and concerns about bank funding costs, bank liquidity position, and deposit outflows as reasons for expecting to tighten lending standards over the rest of 2023.”
• In particular, the report showed “tighter standards and weaker demand” for commercial and industrial loans, an important bellwether for economic growth. Those conditions were seen across all business sizes.
• Also, the report showed the same conditions across commercial real estate categories. “There has been an ongoing tightening of lending conditions, and that is part of part of the process by which monetary policy works,” Treasury Secretary Janet Yellen told CNBC’s Sarah Eisen in response to a question about the report in a Monday “Closing Bell” interview. “The Fed is aware that tightening of credit conditions is something that will tend to slow the economy somewhat, and I believe they are taking this into account in deciding on appropriate policy.”

(Source: CNBC)