EDITOR NOTE: A quarterly Federal Reserve survey revealed that senior loan managers have largely tightened lending standards in the Q3. Most of the loan demand came not from businesses but consumers. The risk in this scenario is that it can potentially trigger a new credit crisis, harming the economy. Despite the Fed’s holding interest rates near zero, it appears as if banks might be bracing for further economic downside, as the pandemic broadens its reach at a time when economic recovery seems largely dim.
U.S. banks tightened credit across the board during the third quarter, pulling back from making loans to businesses and consumers, according to a Federal Reserve survey released Monday.
The quarterly survey of senior loan officers is designed to alert regulators to the potential of a new credit crunch. That’s when banks pull back so far from making loans that it can hurt the economy. The data on Monday doesn’t signal a credit crunch is underway, but it will set off alarm bells among regulators.
The Fed survey found a significant share of banks tightened standards and terms on businesses regardless of their size. Even firms with existing loans found their loan terms tightened somewhat.
The tightening on consumer loans was not as widespread but more banks did tighten standards than eased them.
The largest number of banks raised their standards on consumer credit-card loans compared with auto loans or other consumer loans.
Banks reported that there was weaker demand by businesses for commercial and industrial loans and also real estate.
On the other hand, consumer demand for loans did not dry up.
The economy grew by a record 33.1% annual rate in the third quarter, as business reopened from the shutdown designed to slow the spread of the coronavirus.
For all loan categories, a majority of banks reported that less than 5% of loans were in forbearance in the third quarter.
Originally posted on MarketWatch