U.S. banks are expecting tightened lending standards and weaker demand for business loans this year, with loan performance deteriorating, according to the Federal Reserve.

The Fed’s January survey of senior loan officers found moderate net fractions of banks said they expect to tighten standards on commercial and industrial loans to firms of all sizes, while significant net shares expect to tighten standards for all commercial real estate categories.

Demand is expected to weaken for all business loans, with moderate net shares of banks expecting weaker demand for C&I loans to firms of all sizes, significant net shares expecting weaker demand for CRE loans secured by multifamily properties or nonfarm nonresidential properties, and a major net share expecting weaker demand for construction and land development loans.

“Additionally, banks reported expecting loan performance, as measured by charge-offs and delinquencies, to deteriorate, with either moderate or significant net shares of banks reporting expecting performance to deteriorate for the surveyed business loan categories,” the Fed said.

Banks have been lending freely despite steadily rising interest rates over the past year. But according to The Wall Street Journal, the Fed survey “showed an increasing number of banks bracing for a lending slowdown.”

In January, there were already some signs of a slowdown as banks tightened standards for CRE loans across all categories while a moderate net share of banks reported increasing the premiums charged on riskier C&I loans to large and middle-market firms and a modest net share of banks reported doing so for loans to small firms.

“A less favorable or more uncertain economic outlook was the most cited reason for tightening [C&I loan standards or terms], with reduced tolerance for risk and increased concerns about the effects of legislative changes, supervisory actions, or changes in accounting standards also being cited by more than half of the banks that reported tighter standards or terms,” the Fed noted.

On the consumer side, banks are expecting to tighten standards for all categories of business loans as well as credit card loans and jumbo mortgages.

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