File this data under the category “Signals that banks are restricting credit”.
After some easing of business lending standards in 2021 and 2022, US domestic banks may become more scrupulous about who borrows and the terms they offer on commercial and industrial (C&I) loans.
The Federal Reserve’s second-quarter survey of bank lending practices released Aug. 1 found a large net percentage (24%) of senior loan officers surveyed said they had tightened standards for commercial and industrial lending. (C&I) to large and medium-sized enterprises. And a net 12% of banks increased the spread between their cost of funds and the interest rate they were charging on C&I loans. (See chart, Banks begin to tighten lending conditions.)
Additionally, senior loan officers at the 69 national banks surveyed (minimum $2 billion in assets) indicated a more widespread tightening of standards for all C&I loans in the second half of 2022.
(The results of the Fed’s senior loan officer survey can be difficult to decipher. When the Fed reports “24% net percentage” or “net fraction” of banks, it refers to the difference in percentage between respondents indicating that they had tightened conditions to some extent and the percentage that had eased conditions to some degree In the second quarter, less than a handful of banks eased conditions.However, as in most quarters, about 50% of loan officers indicated that credit standards remained unchanged.)
During the second quarter, a significant percentage of bank officers (20% or more) surveyed said that one of the tightening measures used was to impose a premium on riskier loans. Other measures included raising the cost of credit lines, widening the spread on the bank’s cost of funds and increasing collateral requirements, according to the Fed’s investigation.
The most popular reasons for the tightening changes were a more uncertain economic outlook, the bank’s reduced tolerance for risk, worsening industry-specific problems for the borrower, and diminished liquidity in secondary markets for loans.
Despite the gradual tightening, many banks reported stronger demand in the second quarter for C&I loans to large and medium-sized businesses.
Among the reasons for this healthy appetite, at least according to loan officers, were businesses’ needs for inventory and accounts receivable financing, demand for cash and cash reserves, and a shift in borrowing from other banks or non-bank sources.
This assessment of demand paralleled the acceleration in commercial loan growth that banks reported in second-quarter results. According to analysts Michael Taiano and Christopher D. Wolfe in Fitch Ratings’ Quarterly Banking Commentary, the increase in C&I loan growth at major U.S. banks stems from increased line utilization, strong issuances and slower repayments. .
Loan officers expect a bumpier second half, according to the Fed. They believe that borrowers’ debt servicing capacity could deteriorate due to inflation and collateral values could deteriorate, among other things.
But the bank’s earnings reports showed that credit performance metrics were still very strong historically. Although the need to increase loan-loss reserves squeezed U.S. banks’ profits in the second quarter, that was due to growth in C&I loan portfolios, not poorer loan portfolio performance, said Fitch analysts.
“Management comments continued to suggest there was no indication of an impending recession,” Taiano and Wolfe wrote.