Banks announce harder lending requirements

A new report from the US Federal Reserve shows that banks are tightening their lending standards for both consumer and business loans. This follows the recent failures of three major banks and could lead to a slowdown in the economy in the coming months. Banks are implementing measures such as requiring higher credit scores, higher interest rates, and more collateral to make it harder for businesses and consumers to obtain loans.

According to the senior loan officers survey, 46% of all banks said they had raised standards for commercial and industrial loans, up slightly from the previous quarter. A majority of banks plan to tighten credit even further this year, potentially starving firms and households of credit and increasing the risk of a recession in the second half of the year.

Economists are uncertain when a reduction in lending will start to affect the economy and to what extent. The Federal Reserve staff economists have forecast a “mild recession” for later this year, partly due to the expected reduction in lending. Last week, Federal Reserve Chair Jerome Powell stated that the banking sector’s turmoil could slow the economy and reduce inflation, which could mean that the Fed would not have to raise interest rates as high as it would otherwise.

The Fed’s report also noted that banks are restricting credit for most consumer loans, including auto and credit card lending and home equity lines of credit. The report follows other signs that the collapse of three major banks in the past two months has led other financial institutions to reduce their lending to conserve capital. Tighter credit standards are expected to lead to a reduction in lending, forcing businesses to pull back on expansion plans and reduce hiring, and limiting sales of cars and homes.

The survey polled 65 US banks and US branches of 19 foreign banks. The results were gathered between March 27 and April 7, well after the failures of Silicon Valley Bank and Signature Bank in early March, which touched off the latest round of bank turmoil. The Fed’s report said that mid-sized banks, those with assets between $50 billion and $250 billion like the three failed banks in March, were more likely to report tighter standards.