Standards for many types of loans tightened in the third quarter, while demand for most of those loans also weakened, according to report issued Monday by the Federal Reserve.
The survey also found that two in every five bankers believe a recession is possible within the next 12 months, but they also expect a mild downturn at worst.
According to the Fed’s October 2022 Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS), tighter standards and weaker demand in the third quarter prevailed in commercial and industrial (C&I) loans to firms of all sizes, all commercial real estate (CRE) loan categories, and all categories of residential real estate (RRE) loans (although some standards were unchanged).
Meanwhile, although standards were tighter, demand for home equity lines of credit (HELOCs) and credit card loans grew. Demand was the same for consumer loans and weakened for auto loans, according to the Fed report.
The October SLOOS also included a set of special questions that asked banks to assess the likelihood of approving credit card and auto loan applications by borrower FICO score in comparison with the beginning of the year. The questions were aimed at developing a better understanding about how consumer lending standards have changed conditional on borrower credit quality, the Fed said.
According to the survey responses, the central bank said, banks reported “they were less likely to approve such loans for borrowers with FICO scores of 620 and 680 in comparison with the beginning of the year, while they were more likely and about as likely to approve credit card loan and auto loan applications, respectively, for borrowers with FICO scores of 720 over this same period.”
The survey also included a set of special questions examining banks’ assessments of the likelihood and severity of a recession any time during the next 12 months, and of the expected changes in banks’ lending standards should a recession occur.
The Fed said most banks assigned a probability of greater than or equal to 40% that a recession would occur any time over the next 12 months. Most banks also indicated that if a recession were to occur, they would expect it to be mild to moderate in severity. In general, banks reported expecting to tighten standards across all loan categories should a recession occur, the agency said.
The October 2022 Senior Loan Officer Opinion Survey on Bank Lending Practices