Banks Project Tighter Loan Terms, Standards in 2019

Modest net percentages of banks tightened terms and standards for business loans in the previous quarter, with standards for the most part remaining unchanged, according to the Federal Reserve’s latest senior loan officer opinion survey released today. For large and midsize firms, more banks offered larger credit lines with longer maturities, while also increasing costs, spreads and riskier loan premiums. For smaller firms, however, more banks on net also reduced credit line size and maturities, while they were more likely to cut credit line costs and reduce spreads.

Banks that tightened cited the economic outlook as a major factor. Meanwhile, 53.3 percent (up from 12.5 percent in the previous quarter) cited “increased concerns about the effects of legislative changes, supervisory actions or changes in accounting standards” as a somewhat or very important reason for tightening, a possible signal of the prospective effect of implementing the Current Expected Credit Loss model for loan loss accounting. Banks that eased cited more aggressive competition. Net percentages of banks reported weaker business loan demand from both large and small firms.

A trend toward tightening on commercial real estate loans continued, with modest to moderate net percentages tightening across all CRE categories — by double digits on construction and multifamily loans. Banks reported unchanging or weaker demand for CRE loans. Loan terms and standards for residential mortgages were virtually unchanged, although about one-third of banks on net reported weaker mortgage demand. Standards on credit cards tightened or remained unchanged, with little net change in standards for car loans.

Banks expect the slight trend toward tightening to continue in 2019. On net, about 11 percent of banks expected their lending standards to tighten for both large and small companies, and about a quarter on net expect their loan standards to tighten for CRE loans. Banks expect their standards for conforming mortgage loans to remain unchanged, while on net 12 percent expect to tighten credit card lending standards. The most important reasons cited for projections of tightening were expected declines in collateral values and portfolio credit quality and reduced risk tolerance.