Data about bank lending practices released Monday showed that lending terms tightened in the second quarter, and that banks expect loans to become scarcer still.
The Fed Senior Loan Officer Opinion Survey, a quarterly look at lending practices, showed that in the second quarter, nearly 51% of banks tightened the availability of commercial and industrial loans to companies with annual sales of above $50 billion. That is up from the 46% reported in May for the first quarter and compares to the 55.4% seen in the second quarter of 2008, early in the 2008-2009 financial crisis.
The last time conditions were as tough as the latest quarter was early in the pandemic in 2020 when 71% of banks reported tighter credit standards. The share of banks who made it harder to get a loan rose to a record 83.6% in the fourth quarter of 2008.
Banks said they expect to further tighten loan terms, citing both a more uncertain economic outlook and an expected deterioration in the values of the assets consumers are using to secure loans. Responses to the survey, which included data from 66 domestic banks, were due by June 30.
Policy makers on the Federal Open Market Committee had access to the results before they announced their 11th interest-rate hike since March of last year on Wednesdaylast week.
The data matter because when banks become less willing to offer credit, it can have the same effect as an increase in interest rates by the central bank. Families and businesses find it more difficult, or more expensive, to borrow, which tends to limit demand for goods and services. Fed rate hikes are supposed to do the same thing.
Bank credit standards have steadily tightened relative to their low point in 2021. The Dallas Fed Banking Conditions Survey, a monthly lending indicator, also showed that loan demand declined for the seventh time in a row in June. The Fed’s latest survey may add to expectations that the bank might keep rates steady at its September meeting, rather than raising them to stamp out inflation.
“A key feature shaping our U.S. rates outlook is an expectation that tighter bank
lending standards will lead to a slowdown in growth,” Deutsche Bank strategist Matthew Raskin and his team wrote in a note on July 18.
Economists and strategists have been looking at how changes in lending standards affect the economy, according to their recent notes.
Citigroup
(ticker: C), in a note on June 26, found that a 10-point tightening in credit standards lowers gross domestic product by as much as 0.5% over roughly two years. That indicates the tightening over the past year could mean the level of real GDP would be 2.5% lower than it would have been otherwise.
Goldman Sachs
‘ (GS) Jan Hatzius in a note last month said “we expect tighter credit to subtract 0.4 percentage points from the fourth quarter GDP growth.” He argued that tighter credit could be beneficial in the fight against inflation, saying it “should be manageable and perhaps even somewhat helpful in restraining demand growth so that supply can continue to catch up.”
For now, the economy is chugging ahead. GDP grew at an annual rate of 2.4% for the second quarter, up from 2% in the first quarter. Consumer spending is holding up despite inflation and higher interest rates. Data released Friday showed personal spending rose 0.5% in June, or 0.4% after adjusting for inflation, marking the largest monthly surge since the start of the year.
“The good news is that the U.S. economy has continued to show surprising resilience,” Citi global economist Robert Sockin told Barron’s on Thursday. “Moreover, some areas of lending like various consumer-focused loans have held up better than I would have expected.”
Points to watch once the lending data have come out include the inflation readings for July and August, as well as data on nonfarm employment for both months. The July jobs figures come out on Friday. The FOMC next meets Sept. 19-20.
Write to Karishma Vanjani at [email protected].
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