U.S. banks tightened underwriting standards for business and consumer loans in the third quarter, citing a less favorable or more uncertain economic outlook; a reduced tolerance for risk; and a deterioration in loan credit quality.
The Senior Loan Officer Opinion Survey from the Federal Reserve also found a significant number of banks reported weaker demand for business loans — also called commercial and industrial (C&I) loans — from all-size companies.
The number of inquiries from potential borrowers regarding the availability and terms of new lines of credit also decreased, as well as the number of questions from existing borrowers about possible increases in credit lines.
Most often, commercial credit tightening came in the form of premiums charged on riskier loans, rate spreads over the cost of funds, and costs of credit lines, according to the Fed’s report. On the other hand, only a small number of bankers said their institution tightened up on C&I credit via loan covenants, collateralization requirements, and interest-rate floors.
By bank size, tightening of C&I lending standards and terms was less widely reported by large banks (total domestic assets of $100 billion or more as of June 30) than by small and midsize banks.
Among the reasons for weaker demand from borrowers, according to bankers, were decreased customer investment in plant or equipment; decreased financing needs for inventories, accounts receivable, and mergers or acquisitions; and lower precautionary demand for cash and liquidity.
The fall in demand for credit is not a surprise: companies are avoiding leverage given the rise in interest rates. Indeed, many CFOs are slashing obligations and paying down balance sheet debt. The proceeds are coming from cash flow and, in some cases, sales of assets.
“With so much uncertainty and illiquidity in the bank markets, [we] view expanding our roster of banking relationships as a smart move.”
CFO, Boston Properties
Golden Entertainment, for example, sold a casino resort and a distributed gaming business in the past year that increased its liquidity by $300 million, according to S&P Capital IQ. In the third quarter, Golden use some of the proceeds to repay $175 million of its term loan, said Charles H. Protell, the company’s president, CFO, and treasurer. Other companies are paying down revolvers, leases, and high-cost property mortgages.
Banks are lending to some organizations, of course. Boston Properties, a publicly traded real estate investment trust (REIT), increased its corporate line of credit to $1.8 billion from $315 million in the third quarter, said executive vice president and CFO Michael LaBelle last week on an earnings call.
“We had three new banks approach us, seeking to expand their relationship with us and up-tier the quality of their own client base,” LaBelle said, according to S&P Capital IQ. “With so much uncertainty and illiquidity in the bank markets, [we] view expanding our roster of banking relationships as a smart move.”
The company did note that it would have higher interest expenses in 2024 due to refinancing $1.2 billion in bonds that expired in August and February 2024 and had a weighted average interest rate of 3.5%. Boston Properties plans to hold less cash on its balance sheet so it can avoid using debt to fund its development pipeline.
For consumer borrowers, U.S. banks reported tightening lending standards for credit card and other consumer loans, and to a lesser degree, auto loans. Specifically, a significant number of banks reported tightening both consumer credit limits and the extent to which loans are granted to some customers that do not meet credit-scoring thresholds.
When the Federal Reserve asked bankers why they changed standards or terms for loans across both consumer and commercial categories, among the reasons cited were concerns about funding costs; a deterioration of customer collateral values; and concerns about the adverse effects of legislative changes, supervisory actions, or changes in accounting standards.