Fed Survey: Loan Demand Plummets in Second Quarter

As the U.S. economy dove deeper into recession amid the coronavirus pandemic in the second quarter, more than half of banks reported weaker demand for commercial and industrial loans, according to the Federal Reserve’s latest survey of senior loan officers released yesterday. Businesses with stronger demand for C&I loans sought to bulk up on cash or replace lost revenue. Client demand for commercial real estate and consumer debt demand also plummeted, while low rates drove higher demand for mortgage loans.

C&I. As the overall economy and specific industries’ conditions worsened, more than two-thirds of banks reported tightening standards for C&I loans for firms of all sizes—substantially larger shares seen than in previous reports. No banks reported easing standards for C&I loans. Banks tightening were most likely to tighten by increasing spreads, raising premiums on riskier loans, adding covenants and collateralization requirements and using interest rate floors. C&I loan demand was mixed, with about a quarter of banks seeing stronger demand from firms of all sizes, driven almost entirely by falling customer revenues or protective demand for liquidity. However, 40.7% of banks saw weaker demand from large and midsize firms, while 54.3% of banks saw weaker demand from smaller firms; the most important reasons cited were declining need for client investments, M&A financing and inventory financing. (The report does not indicate loan officers’ views on Paycheck Protection Program loans.)

CRE. Accelerating from the second quarter’s C&I loan pattern, roughly four in five banks tightened standards to some degree on construction and land development loans and loans secured by nonfarm nonresidential properties, while two-thirds tightened on multifamily residential property loans. No banks reported easing standards for CRE loans, and most banks reported weaker demand for CRE loans.

Mortgages. After a small net percentage of banks tightened standards for conforming mortgages in the first quarter, more than half of banks said they tightened standards for GSE-eligible and government mortgage loans in the second quarter. Two-thirds said they tightened standards on jumbo loans; no banks eased standards in any mortgage category. However, demand remained strong as interest rates remained near historic lows. As many as half of banks reported stronger demand for mortgages in every category, with nearly a quarter reporting “substantially stronger” demand for conforming loans. About two-thirds of banks also reported tightening on home equity lines of credit, for which demand was mixed.

Personal loans. More than seven in 10 banks reported tightening standards on credit cards—mostly by cutting credit limits, increasing minimum credit scores and limiting exceptions—and the long-running tightening trend on auto loans accelerated sharply, with 55% of banks tightening. Nearly two-thirds of banks reported falling demand for credit card loans, while nearly half on net said demand fell for car loans.