By Anaya Jhaveri and John Paul Rothenberg
ABA Data Bank
The Federal Reserve’s senior loan officer opinion survey, or SLOOS, is a cornerstone for understanding how credit standards and loan demand are shifting within the banking industry. While the headline figures on net percentage changes in lending standards are often discussed, the granular details—particularly the reasons behind these shifts—offer deeper insights that are vital for bankers looking to anticipate market trends and adjust strategies accordingly. In this first post of our series, we’ll delve into commercial and industrial loans in the most recent SLOOS for Q2 2024, examining how economic conditions and industry-specific challenges have shaped the lending landscape. (Going forward, this analysis will be updated following each quarterly SLOOS release.)
How banks are adjusting loan terms in 2024
The latest data presents a nuanced picture of how banks are managing their lending standards, highlighting both tightening and easing trends across various loan terms. When comparing the percent of banks reporting tightening versus easing certain loan terms and looking at the net percentage of banks easing (percent of banks easing minus the percent of banks tightening), the data reveals a complex picture of tightening and easing dynamics in the banking sector.
Figure 1 shows the percentage of banks easing loan terms on net. While there was a distinct peak in the easing of loan terms around mid-2021, a significant decline followed through 2022 into 2023. In 2024, the net values remain well below their post-COVID easing peaks, indicating that most banks are still cautious. However, all C&I loan terms have seen less net tightening from the recent lows of 2023, some quite dramatically. The spread of loan rates over the cost of funds (red) has even moved into net easing territory. This overall trend toward neutral suggests that some banks are beginning to loosen their lending criteria, potentially due to competitive pressures covered below.
Rationales for loan term changes
In the July 2024 SLOOS, one of the more intriguing developments is the changing reasons behind banks’ decisions to ease or tighten credit standards. Historically, economic outlook and competition have been the dominant forces in shaping lending behavior. However, the most recent data reveals a subtle yet significant shift.
The main takeaway from figure 2 is that banks are seeing reasons for easing again after flatlining in 2023. Banks are citing competitive pressures (red) as the main driver for easing, which aligns with recent articles and communications from the Fed about competition from nonbank entities. At the same time, there is a noticeable decrease from the last survey in respondents citing most other drivers for easing and particularly so for a more favorable economic outlook (orange). This shift suggests that banks are becoming more aggressive in their lending practices, not necessarily because they see brighter economic skies, but because they feel the heat from their competitors—many of which operate outside of the prudential regulatory perimeter.
Conversely, figure 3 shows that the reasons for tightening have seen a general decline, with fewer banks citing reasons like economic uncertainty (orange) or risk tolerance (purple) compared to previous quarters. However, concern over industry-specific problems (green) and legislative changes (grey) did not decline with most other reasons. This indicates that while overall economic concerns may be stabilizing, sector-specific challenges and regulatory uncertainty continue to weigh heavily on lending decisions.
The dynamics of C&I loan demand
Figure 4 illustrates the changes in demand for C&I loans as reported by banks. The figure shows that demand (dotted blue line) went from a net negative to a neutral position in the most recent quarter, indicating a stabilization in the market. After a period of substantial weakness starting in 2022 and through 2023—characterized by a significant portion of banks reporting moderately (light red) and substantially weaker demand (dark red)—the past few months have seen a gradual shift toward recovery. The increase in moderately stronger demand (light green) plus the appearance of some substantially stronger demand (dark green) support the notion that businesses are slowly beginning to regain confidence in borrowing for operations.
Figure 5 illustrates the reasons cited by banks for changes in C&I loan demand from 2019 to 2024. With all responses trending upwards in the most recent survey, an increase in customer inventory financing needs (blue) shows a noticeable upward acceleration in 2024, reflecting businesses’ need to replenish or expand their inventory levels. However, customer investment in plant or equipment (green) remains subdued and in net negative territory, indicating that fewer businesses are borrowing to finance capital expenditures, possibly due to lingering economic uncertainties or high borrowing costs. These mixed signals underscore a complex lending environment where banks must balance the dynamics of increased inventory financing needs against reduced capital expenditure borrowing.
Conclusion
The latest SLOOS data reveals how economic conditions, competitive pressures, and changing business needs are shaping lending trends. This post has gone beyond the analysis in the public SLOOS report and illustrates how C&I loan terms are still tightening overall but the tightening is less widespread. Competitive pressures are driving this easing, while concerns over factors such as economic uncertainty and government actions are leading some banks to tighten loan terms. The demand for C&I loans suggests that firms are borrowing for inventory financing needs and less so for investments for future growth. The next post in this series will investigate the consumer components of the SLOOS.
Anaya Jhaveri was a 2024 ABA summer intern and is a student at the University of Miami. John Paul Rothenberg is VP for banking and economic policy research at ABA.
For additional research and analysis from the ABA’s Office of the Chief Economist, please see the OCE website.
