Banks report toughest loan standards in years

The share of America's banks that said they're making it harder for consumers and companies to get a loan is still growing, according to a survey conducted by the Federal Reserve.

Why it matters: It all adds up to possible headwinds for the U.S. economy. Banks are being choosier about extending credit, making it more expensive for households and businesses to get a loan. At the same time, demand for such loans has plummeted.

The big picture: Banks have been gradually tightening credit as a result of the Fed's ultra-aggressive rate hiking campaign — an intended side effect of the central bank's efforts to cool the economy and bring down inflation.

By the numbers: A net 51% of banks said they had tightened lending standards for larger and medium-sized businesses over the last three months, per the latest Senior Loan Officer Opinion Survey, out Monday.

• That's up from roughly 46% of banks who said the same in the first quarter of this year. Excluding the pandemic onset, the latest survey shows the largest net share of banks reporting tighter standards since the 2008 financial crisis.
• For loans to small firms, a net 50% of banks said they tightened standards — about 2.5 percentage points above the first quarter.

For consumers, a higher net share of banks said they toughened up standards for credit card loans (36%).

• For auto loans, fewer banks reported tighter standards compared to the prior quarter (15% vs. 27%). However, that's still among the highest share on record since 2011 (excluding the pandemic).

What they're saying: "[T]he economy is facing headwinds from tighter credit conditions for households and businesses, which are likely to weigh on economic activity, hiring, and inflation," Fed chair Jerome Powell said at a news conference last week.

• What remains unclear is the extent to which this spring's bank failures sped up the tightening of lending that was previously underway: "I think it's really hard to tease out … how much of [the tighter loan standards] is from this source or that source, but I think what matters is the overall picture is of tight and tightening lending conditions," Powell said.
• Surveyed banks most commonly cited "a less favorable or more uncertain economic outlook" and "reduced tolerance for risk" as the top reasons for tightening credit standards.

Meanwhile: Banks are also reporting depressed demand for loans.

• The net share of banks who said they saw strong loan demand from large and mid-sized firms remains among the lowest since the 2008 financial crisis — though it edged up slightly during Q2.

The bottom line: The survey results show businesses have a higher bar to clear to get a loan to buy equipment or hire more workers than they've had in years. For everyday Americans, it could be more difficult to get a loan to buy goods — with ripple effects for companies that sell them.

• That could weigh further on the economy, which has already showed signs of cooling but has so far remained resilient despite the rapid rate hikes.