Credit & Capital

Banks Report Tightening Loan Standards in Q3

A Fed survey shows banks are continuing to raise the bar for lending in response to worsening economic conditions.
Matthew HellerNovember 10, 2020

U.S. banks tightened standards for business and consumer loans in the third quarter amid continued uncertainty over the economic outlook.

The Federal Reserve’s quarterly survey of senior loan officers found that significant net shares of banks reported having raised the bar for commercial and industrial loans to both large and middle-market firms and to small firms.

Banks also tightened all lending terms across firms of all sizes, including increased collateralization requirements, loan covenants, premiums charged on riskier loans, and the use of interest rate floors for both loans to small firms and loans to large and middle-market firms.

“Major net shares of banks that reported tightening lending standards or terms cited a less favorable or more uncertain economic outlook, worsening of industry-specific problems, and reduced tolerance for risk as important reasons for doing so,” the Fed said.

As American Banker reports, the survey findings “marked the continuation of a trend that began during the first quarter of 2020, when many banks tightened their lending standards in response to worsening economic conditions.”

Banks also tightened standards in the third quarter across all three major commercial real estate loan, all categories of residential real estate loans, and all three consumer loan categories.

Borrower demand for credit card loans, auto loans, and most categories of residential real estate loans rose but borrower demand was weaker for commercial and industrial loans, as well as for various kinds of commercial real estate credit, including construction loans and multifamily housing loans.

“The survey’s findings on loan demand suggest that U.S. businesses and consumers were on divergent paths at the end of the third quarter, with consumers having benefited from government stimulus payments, even as many businesses continued to struggle,” American Banker said.

The Fed also found that for all loan categories, a majority of banks reported that less than 5% of loans were in forbearance in the third quarter. “Payment deferral was the most widely cited form of forbearance for CRE, RRE, and consumer loans, while covenant relief was the most cited form of forbearance for C&I loans,” the Fed said.