Proportion of US Banks Tightening Loan Terms Rises to 50.8%

Banks are continuing to tighten their terms on commercial and industrial loans.

The proportion of U.S. banks tightening their terms on such loans for medium and large businesses rose to 50.8% in the second quarter, up from 46% in the first quarter, Bloomberg reported Monday (July 31), citing figures from a survey by the Federal Reserve.

Fed Chair Jerome Powell said, per the report, “I think it’s really hard to tease out whether how much of that is from this source or that source, but I think what matters is the overall picture is of tight and tightening lending conditions.”

The release of this report comes in the aftermath of the collapse of four U.S. regional banks since March, which sparked financial turmoil and caused concerns of limited credit availability possibly pushing the U.S. economy into a recession, according to the report. However, recent data has shown the economy to be resilient.

The survey also found that the demand for credit remains weak, the report said. The share of banks reporting weaker demand for commercial and industrial loans among large and midsize firms fell to 51.6%, down from 55.6% in the first quarter.

As PYMNTS reported Monday, the tightening of underwriting standards by banks means the traditional avenues of lending are narrowing and signals tougher times ahead for small businesses seeking access to credit.

Banks are also looking to tighten standards through at least the rest of the year.

It was reported on July 24 that regional banks across the country are deciding to cut back on lending in order to preserve capital and improve margins.

Banks are unloading low-yielding bonds and loans or letting them mature and not replacing them in order to raise the average interest rates they earn on their assets, The Wall Street Journal (WSJ) reported. This improves the margins they earn on lending and investments, and has the potential to stabilize a bank’s earnings performance in the near term.

Cutting back on lending also helps these banks preserve capital. Furthermore, loans are particularly attractive to cut back on due to government rules that require them to be weighted much more heavily than bonds in calculating how much capital a bank must hold.