Banks Tightened Lending Standards for Nearly All Loans in 4th Quarter: Fed

People use ATMs at a Chase branch bank in New York City. Banks are important for the economy but their lending practices lead to inequality. Chris Hondros/Getty Images

Nearly every type of loan was harder to obtain in the fourth quarter as lenders requested higher credit scores and applied higher interest rates, according to findings from the latest quarterly Federal Reserve study.

The U.S. central bank’s latest Senior Loan Officer Opinion Survey (SLOOS) on Bank Lending Practices, consisting of 84 banks, found that financial institutions tightened their lending standards for credit cards, mortgages, home equity lines of credit (HELOC), auto loans, and other consumer-related loans.

They were more cautious about who they lent money to in the three months ending in December. Lenders bolstered minimum required credit scores and minimum payment amounts on outstanding balances. Banks also raised interest rates for almost every kind of loan.

At the same time, borrowers had little appetite for debt as the SLOOS data highlighted declining demand across the board, mainly driven by higher borrowing costs.

“Regarding demand for consumer loans, a moderate net share of banks reported weaker demand for auto loans, while modest net shares of banks reported weaker demand for credit card and other consumer loans,” the report stated.

Comparable trends were observed in business lending, including tighter terms on commercial and industrial lending, increased premiums on riskier loans, a jump in servicing costs on credit lines, and greater collateralization requirements.

“Major net shares of banks that reported having tightened standards or terms on C&I loans cited a less favorable or more uncertain economic outlook, a reduced tolerance for risk, less aggressive competition from banks or nonbank lenders, and deterioration in their current or expected liquidity position as important reasons for doing so,” the quarterly study stated.

While loan officers were not as ebullient to lend to commercial outfits, “significant net shares of banks reported weaker demand for loans from firms of all sizes,” the SLOOS report found.

Looking ahead to 2024, the Fed study discovered that banks anticipate these lending standards for commercial and consumer lending to remain unchanged. Despite these tougher practices, “banks reported expecting loan demand to strengthen across all loan categories.”

State of Credit

Even in a tighter and more restrictive climate, consumer demand for credit was robust in the home stretch of last year.

Separate Fed data revealed that total consumer credit surged by $23.7 billion in November, marking the biggest monthly increase of 2023. Revolving credit (credit cards) advanced by $19.1 billion, and non-revolving credit (auto and student loans) jumped by $4.6 billion. Economists forecast that the Fed will show a $16 billion boost in December.

Households are growing more confident that credit will be easier to obtain one year from now, according to the New York Fed’s December Survey of Consumer Expectations.

While tighter lending standards did not harm economic growth in 2023, ING economists think this is unlikely to continue in 2024, and this could force the Fed to cut interest rates.

“With the cost of and access to borrowing being restrictive this is a clear headwind that will help slow the economy through the first half of 2024 and make the Federal Reserve more amenable to the idea of interest rate cuts,” said James Knightley, the chief international economist at ING, in a note.

The Fed was recently surprised by financial markets when it suggested that it was not yet ready to pivot.

At the January Federal Open Market Committee (FOMC) policy meeting, the central bank noted that it “does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.”

Trader John Bowers works on the floor of the New York Stock Exchange on Aug. 25, 2023, as Federal Reserve Chair Jerome Powell's speech shows on a television screen. Richard Drew/AP Photo

During the post-FOMC press conference and in a Feb. 4 “60 Minutes” interview, Chair Jerome Powell told reporters that the members would unlikely pull the trigger on a rate cut next month.

“All but a couple of our participants do believe it will be appropriate to, for us to begin to dial back the restrictive stance by cutting rates this year,” Mr. Powell said to host Scott Pelley. “And so, it is certainly the base case that, that we will do that. We’re just trying to pick the right time, given the overall context.”

Impact on the Economy

In recent months, the consensus has been that the first quarter of 2024 would be the start of a slowdown in the economic landscape, with a smaller crowd forecasting a recession.

Even the Fed, in its latest Summary of Economic Projections (SEP), predicted 1.4 percent real GDP growth this year. Additionally, the Philadelphia Fed’s Survey of Professional Forecasters suggests real GDP will be just 0.8 percent in the first three months of 2024.

However, early projections suggest that the January-to-March span could be a continuation of the last two quarters.

The Atlanta Fed Bank’s GDPNow model indicates a 4.2 percent expansion, and the New York Fed Staff Nowcast estimates a 3.3 percent growth.

Is a soft landing ahead?

Mr. Powell told reporters that he believes it is premature to declare victory, noting that the economy is still healing from the coronavirus pandemic.

But experts believe the present climate could result in an economy with the labor market intact, inflation returning to the 2 percent target, and steady growth.

“Perhaps the Fed can thread the needle and engineer the elusive soft landing without the economic or market disruptions experienced in previous cycles. The current environment appears favorable and we’ll all be watching closely,” said John Lynch, the CIO at Comerica Wealth Management, in a note.