US banks tightened lending standards in the first few months of this year, and expect to continue to do so for the rest of this year, a US Federal Reserve survey released on Monday said.
The report, which is closely watched on Wall Street, comes as the financial sector contends with deposit outflow worries on the back of turmoil after the high-profile collapse of Silicon Valley Bank and Signature Bank in March.
In the past few weeks, shares of midsized banks were hit by brutal trading days, while investors remained on edge for a repeat of earlier episodes in which deposit runs precipitated or played a significant role in bank failures.
Asked about their outlook for lending standards over the rest of the year, “banks reported expecting to tighten standards across all loan categories,” the Fed said.
Among the most frequently cited reasons were an expected deterioration in the credit quality of loan portfolios and in customers’ collateral values, alongside reduced risk tolerance, the senior loan officer opinion survey on bank lending practices said.
Other reasons included “concerns about bank funding costs, bank liquidity position, and deposit outflows,” the survey said.
In the first quarter, respondents reported tighter standards and weaker demand for various types of loans to businesses and households, the report said.
“In general, the tightening in standards for business loans was more frequently reported across the mid-sized banks,” it said.
On commercial and industrial lending, midsized and other banks more often cited their liquidity positions and issues such as heightened concerns about the effect of legislative changes, and among banks’ worries was an uncertain economic outlook, the report said.
It was “hardly surprising” that many banks tightened lending standards across a range of loans in the first three months this year, Oxford Economics lead US economist Michael Pearce said in a note.
“The bigger concern is that a majority of banks plan to tighten standards further over the rest of the year,” he said. “That will starve firms and households of credit and help push the economy into recession in the second half of this year.”
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