US banks plan to tighten lending standards amid loan loss fears

US banks expect to tighten lending standards over the course of the year because of worries about rising losses in their loan portfolios and concerns that customers will continue to withdraw deposits, according to a survey from the Federal Reserve.

The results of the US central bank’s quarterly Senior Loan Officer Opinion Survey, or Sloos, will add to fears the US economy could face a credit crunch this year. Banks said the tighter lending standards were prompted by concerns about a recession, the Fed’s campaign of swiftly lifting interest rates and deposit withdrawals in the wake of the March 10 collapse of Silicon Valley Bank.

The largest banks, those with at least $250bn in assets, blamed the potential lending slowdown on an uncertain economic outlook, according to the survey data published on Monday.

“In comparison to the largest banks, midsized [with between $50bn and $250bn in assets] and other banks more frequently cited concerns regarding their liquidity positions, deposit outflows, and funding costs as reasons for tightening,” the Fed wrote.

In an attempt to retain depositors, some banks have offered better yields on savings accounts, weighing on profit margins.

Mid-sized banks, which have faced the most significant deposit outflows, also flagged fears of stricter regulations and potential changes to accounting rules. The Fed has said it is looking specifically at the rules for this size of bank as part of its response to the failure of SVB.

The Financial Accounting Standards Board has been pressed to force banks to recognise unrealised losses on securities such as those held by SVB, even when management insists they will never have to be sold.

The results from the Sloos showed that banks over the course of the first three months of 2023 had pulled back in commercial and industrial lending, real estate lending and consumer lending.

Three-quarters of respondents to the survey also flagged worries about declining values of borrowers’ collateral.

On Wall Street, banks are becoming increasingly concerned about falling commercial property prices, particularly offices which have been hit hard by the trend of remote work following the Covid-19 pandemic.

For its survey, the Fed received responses from 65 US banks and 19 branches of foreign lenders. Fed chair Jay Powell last week flagged that the data would show some banks had further tightened their lending standards.

“Banking data will show that lending has continued to grow, but the pace has been slowing really since the second half of last year,” Powell said.

The US central bank last week lifted its benchmark interest rate above 5 per cent for the first time since 2007.

Additional reporting by Stephen Gandel