C-Suite Wednesday – Loan Demand is Dropping and Banks are Tightening Credit Conditions

August 2, 2023

Delaney Sexton
Contributing Editor

C-Suite Wednesday – Loan Demand is Dropping and Banks are Tightening Credit Conditions

Loan officers across the country reported tightening credit standards and lower demand for all loan categories in The Federal Reserve’s Senior Loan Officer Opinion Survey. For commercial and industrial (C&I) loans, tighter standards and weaker demand are consistent with businesses of all sizes during the second quarter of 2023. All banks have tightened their credit standards for CRE loans and anticipate that this trend will continue throughout the year.

This is what senior loan officers are saying:

C&I Loans

In the second quarter, banks reported tightening all loan terms on C&I loans to firms of all sizes. A significant share of banks reported being stricter on the maximum size and maturity of credit lines, loan covenants, collateralization requirements, and the use of interest rate floors. Many banks reported a reduced tolerance for risk, deterioration in their liquidity positions, worsening industry-specific problems, increased concerns over the effects of legislative changes/supervisory actions/changes in accounting standards, and decreased liquidity in the secondary market as the causes of tightening standards for C&I loans.

Demand for C&I loans has fallen for businesses of all sizes. Also, the number of inquiries from borrowers about the availability and terms of credit lines dropped. Those banks that reported less demand reported decreased customer investment in plant and equipment, decreased inventory financing needs, decreased merger and acquisition financing needs, and decreased accounts receivable financing as major causes for weaker demand.

CRE Loans

Overall, CRE loan standards are tightening to a similar degree amongst large banks and banks of other sizes. Banks reported lower demand for all CRE categories during July, with other banks seeing weaker demand than larger banks.

Outlook for the Second Half of 2023

For the second half of 2023, banks are expecting that their credit standards will continue to tighten across all categories of loans. Banks cited an uncertain economic outlook, an expected deterioration in collateral values, and an expected deterioration in credit quality of CRE and other loans as the top reasons for tightening credit standards.

Source:
July 2023 Senior Loan Officer Opinion Survey on Bank Lending Practices