It’s raining in the U.S. economy, and the bankers want their umbrellas back. Or, at least, they aren’t giving out any new ones.

When the economy clouds over and bankers’ risk models start to look not so good, they do what they have to do for their own business’s survival: tighten the terms of lending.

Therefore, it was of little surprise yesterday that the Federal Reserve’s senior loan officer survey, taken in July, showed that banks are tightening standards for commercial and industrial (C&I) loans, along with many other lending products. The tightening of C&I loans standards is happening in deals with large, middle-market, and small businesses.

A significant number of the U.S. banks surveyed said they had also increased their use of interest-rate floors, collateralization requirements, loan covenants, premiums charged on riskier loans, and loan spreads over the bank’s cost of funds.

Banks said standards are tightening because of the uncertain economic outlook, worsening of industry-specific problems, and reduced tolerance for risk, according to the Fed survey. A significant number of banks also mentioned deterioration in the bank’s current or expected capital position; less aggressive competition from other banks or nonbank lenders; decreased liquidity in the secondary market for C&I loans; and increased concerns about the effects of legislative changes, supervisory actions, or changes in accounting standards.

Demand for C&I loans was also weaker, banks said, and the number of inquiries from potential borrowers fell. Why the fall in demand? Banks cited a decrease in customers’ inventory financing needs, a decline in customers’ accounts receivable financing needs, a decrease in customers’ investment in plant or equipment, and a decrease in customers’ merger or acquisition financing needs. Many banks also reported an increase in customers’ internally generated funds and a decrease in customers’ precautionary demand for cash and liquidity.

The loan terms story is much the same in commercial real estate (CRE). Banks tightened standards and reported weaker demand across all three major CRE loan categories — construction and land development loans, nonfarm nonresidential loans, and multifamily loans.

For loans to households, banks tightened standards on residential real estate loans and across all three consumer loan categories — credit card loans, auto loans, and other consumer loans. The demand for consumer loans weakened over the second quarter, especially in auto and other consumer loans.

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