Federal Reserve Banks Report Tighter Credit Standards for 9th Consecutive Quarter

April 23, 2024

Delaney Sexton
Contributing Editor

Federal Reserve Banks Report Tighter Credit Standards for 9th Consecutive Quarter

The Federal Reserve Bank of Kansas City delivered its Small Business Lending Survey for the fourth quarter of 2023. They found that trends related to credit standards, credit quality, and loan demand persisted going into the new year.

About 22% of respondents reported that loan demand is lower, and this was consistent across all bank sizes. For the seventh consecutive quarter, there has been a decline in loan demand.

Loan approvals at small banks saw a minor increase in the last quarter. Up 1%, small banks’ approvals reached 89%. At large and midsized banks, loan approval rates declined. Approval rates at large banks dropped from 52% to 49%. Loan approval rates at midsized banks dropped from 68% to 66%. The most common reason (67%) for denying a loan was the borrower’s financials.

Bank credit standards tightened for the ninth consecutive quarter. About one-fourth of respondents tightened credit standards in the last quarter of 2023. The top reason for tightening credit standards was a less favorable or more uncertain economic outlook. Other common reasons include worsening industry-specific problems and reduced tolerance for risk.

Some banks (16% of surveyed banks) reported that lending to small businesses was constrained by the availability of liquidity in the market. This is up 5.5% from the first quarter of 2023. For those that reported more constrained lending, the most cited reason was greater competitive pressures for deposits.

There was a slight improvement in responses related to credit quality, but there continues to be a general decline in credit quality. Most recently, about 17% of survey respondents reported a decline in applicant credit quality compared to 21% reporting a decline in the third quarter of 2023. When reporting a change in credit quality, 44% of respondents credited it to the business owners’ debt-to-income level and liquidity position. Other reasons for the change in credit quality include credit scores, personal wealth of business owners, quality of collateral, and recent business income growth.

Small Business Lending Survey Q4 2023