Fed Survey: Small Businesses, CRE Face Tighter Bank Lending

Concerns about the health of the U.S. economy have led banks to tighten lending standards, according to a new Federal Reserve survey.

The central bank’s latest Senior Loan Officer Opinion Survey on Bank Lending Practices for October, published Nov. 2, revealed an uneven credit backdrop in the third quarter, CNBC reported, with smaller businesses, riskier households, and commercial property in particular facing a lending squeeze.

According to CNBC, the latest quarterly SLOOS study for October, which gathered responses from 61 domestic banks and 18 U.S. branches of foreign lenders, covered changes in lending standards, terms, and demand during the third quarter.

The survey tracks banks’ reported lending standards, terms, and demand, not actual loan volumes, offering a snapshot of evolving credit conditions and sentiment, CNBC said.

Small Businesses Squeezed

CNBC noted that commercial and industrial lending to large and middle-market firms was broadly unchanged from the previous survey. Banks did, however, tighten lending to smaller businesses.

“Banks reported tightening standards for premiums charged on riskier loans for firms of all sizes,” the report noted. Lenders pointed to a less favorable or more uncertain economic outlook and worsening industry-specific problems as the key reasons for the shift.

CNBC noted that commercial real estate is also emerging as a pressure point, with banks reporting tightened standards across the board on construction and land development, nonfarm nonresidential properties, and multifamily properties, and weakening demand for loans in all CRE categories.

Banks are also tightening credit standards for nonbank financial firms such as private equity funds and business and mortgage credit intermediaries, CNBC reported. That pullback comes amid growing demand for liquidity from private equity funds and business credit intermediaries, with lenders again highlighting strong economic uncertainty and concerns over the deteriorating financial strength among NDFI borrowers.

CNBC reported that while banks have left mortgage standards mostly unchanged, there has been easing for jumbo mortgages, but tighter rules for subprime loans, as banks reported weaker demand, on balance, across all residential real estate loan categories.

“Banks reported being more likely to approve credit card applications to super-prime and prime borrowers and less likely to approve applications to subprime borrowers, with small banks driving the trend for subprime borrowers,” the report noted.

Credit Stress

Tiffany Wilding, Managing Director and Economist at PIMCO, said small businesses, housing and debt-laden firms face tighter credit and higher borrowing costs as the AI investment boom squeezes other parts of the U.S. economy.  

“Higher government bond yields have catalyzed a broader repricing of credit risk, especially for lower-quality borrowers,” Wilding said in a note in October.

Signals of credit stress among riskier households chime with a recent CNBC and SurveyMonkey poll that showed that one in five Americans who rent or have a mortgage spend at least half of their pretax income on housing, while 49% spend between 25% and 49%.

CNBC noted that lender guidance recommends consumers spend 28% to 30% of their income on housing.