Banks made obtaining a loan tougher for consumers and businesses in recent months amid the collapse of Silicon Valley Bank and two other institutions, heralding a dimmer outlook for the U.S. economy, according to a Federal Reserve survey.
Forty-two percent of banks said they somewhat tightened lending standards for large and midsize companies over the past three months, according to the Fed’s Senior Loan Officer Opinion Survey. And 45% said they somewhat toughened lending criteria for small firms.
A similar percentage of banks already was making borrowing more challenging for consumers and businesses in the prior three-month period because of an increasingly uncertain economy and the Fed’s aggressive interest rate hikes.
While banks repeated their concerns about the economy and a reduced tolerance for risk in the latest survey, more small and midsize banks cited worries about customers’ withdrawal of deposits, liquidity concerns and funding costs.
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Banks also toughened lending standards for consumer, auto and credit card loans, according to the survey. Credit card balances have reached a record level and delinquency rates have edged higher as low- and middle-income households grapple with high inflation.
The banks also said they expected to further toughen lending criteria the rest of the year for all types of loans.
Demand for loans by households and businesses also has waned, the survey said. Customers’ appetite for borrowing to finance home and auto purchases has decreased as the Fed has sharply lifted interest rates over the past 14 months, jacking up borrowing costs.
In March, Silicon Valley Bank and Signature Bank collapsed as many customers withdrew deposits because of worries about the banks’ survival amid substantial investment losses. The value of their Treasury bond holdings had plunged as the Fed sharply lifted interest rates over the past 14 months.
The Fed, Treasury Department and Federal Deposit Insurance Corp. eased the panic by announcing they would ensure depositors could obtain their money even if their accounts exceeded the FDIC’s $250,000 insurance limit.
But concerns rippled to other regional banks and last week First Republic Bank became the third bank to fail.
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Last week, the Fed hiked its key interest rate by a quarter percentage point to a range of 5% to 5.25%, capping its biggest flurry of rate increases in 40 years to tame a historic inflation surge. But the Fed indicated it now could pause, noting the banking crisis likely would dampen economic growth and inflation, leaving the Fed less work to do.
“In principle, we won’t have to raise the rate quite as high as we would have had this not happened,” Fed Chair Jerome Powell said at a news conference.
