This month, Principal Credit Analyst Rob Hajduch revisits the Federal Reserve Senior Loan Officer Opinion Survey.

Rob Hajduch, Principal Credit Analyst

The Federal Reserve conducts periodic surveys of approximately 80 large domestic banks and 24 U.S. branches and offices of foreign banks to gauge changes in lending standards and terms as well as measure demand for credit among businesses and households. Generally conducted quarterly, the most recent results (data as of Q3:20 released in Q4:20) revealed additional tightening of credit standards across all loan categories after lending standards were tightened sharply in the second quarter in response to the outbreak of the COVID-19 pandemic.

Respondents tightened lending standards across all consumer loan categories encompassing residential mortgages, credit cards, auto loans and other installment loans. Tightened standards for residential mortgages expanded on those reported in the second quarter survey including GSE-eligible mortgages and qualified jumbo mortgages. Other consumer lending terms were broadly tightened, with increased minimum credit score requirements across all loan categories specifically identified. Lending terms on commercial and industrial (C&I) loans and commercial real estate (CRE) loans to firms of all sizes were universally tightened over the quarter. Responding banks reported increased collateralization requirements, more restrictive loan covenants, elevated premiums on riskier credit, application of interest rate floors, shorter maturities and reduced credit lines across all commercial loan categories during the period. 

The current survey includes additional questions to measure the level of existing credit continuing to benefit from forbearance, with the majority of respondents reporting that less than 5% of total loans were in some form of forbearance in the third quarter. Payment deferral was the most common form of forbearance for CRE, residential mortgages and consumer loans - with covenant relief being the most typical form for C&I loans.  

Rationales for the incremental tightening of lending standards included less favorable or more uncertain economic outlooks and worsening industry-specific problems, particularly in the hospitality, travel, retail and energy sectors.  Reduced risk tolerance in the face of potential legislative, supervisory and accounting standards was also cited. On balance, the concerns more than offset continued strong loan asset quality, the record levels of deposits currently parked on bank balance sheets and the anticipated broad distribution of COVID vaccines.    

With respect to demand for credit, the survey revealed a universal weakening in C&I loan demand driven by a decrease in inventory and accounts receivable financing needs as well as a lower appetite for plant or equipment investment. Consumer loan demand by contrast began to exhibit embryonic signs of life, with stronger loan demand reported across all loan categories by the larger responding banks. 

Our opinion from the second quarter survey that this atypical alignment of low loan demand together with tightened lending standards is constructive from a longer-term perspective is unchanged. Even with expected deterioration in loan asset quality into the second half of 2021, consumer de-levering early in the current cycle coupled with stronger bank balance sheets versus the 2008-2010 cycle have positioned both borrowers and lenders to support the recovery as it gains momentum over the coming year.

Sources

Board of Governors of the Federal Reserve System

October 2020 Senior Loan Officer Opinion Survey on Bank Lending Practices