Latest data from the Federal Reserve Board’s quarterly Senior Loan Officer Opinion Survey (SLOOS) show recent lending policies of eighty large domestic banks and twenty-four U.S. branches and agencies of foreign banks. The survey’s respondents reported, on the whole, that they tightened standards on Commercial Real Estate (CRE) loans and did not change the standards applied to Commercial and Industrial (C&I) loans over the fourth quarter of 2018. Meanwhile, a net share of banks indicated that demand for both C&I and CRE loans weakened over the fourth quarter.

This quarter’s iteration of the SLOOS, in addition to addressing changes in the standards and terms on, and demand for, bank loans to businesses and households, had some additional, special questions related to banks’ outlook for 2019 for the aforementioned loan categories.

The figure above shows the lending standards on C&I loans to large and middle-market firms and the net percentage of banks reporting stronger demand of C&I loans from 1992 to the present. The grey-shaded regions signify the presence of recessions in the U.S. economy. When recessions had occurred in the past, they were correlated with declines in the net percentage of banks reporting stronger demand of C&I loans. Through the last quarter of 2017 and first three quarters of 2018, there was a net easing of banks’ lending of C&I loans, usually exceeding 10% of all banks surveyed. It was only in the last quarter of 2018, the net percentage of banks reporting tightening of lending of C&I loans was small but positive, essentially leaving the lenient lending standards (i.e., net tightening percentages below zero) that had prevailed for 2017 and 2018. The net percentage of banks reporting stronger demand for C&I loans, however, was negative for all of 2018, implying that demand had weakened in this category.

In the fourth quarter of 2018, the Survey’s respondents reported a net tightening in CRE loans, which include those secured by construction and land development, nonfarm nonresidential, and multifamily properties. Additionally, there was a negative net demand across all these loan categories.  Of all the categories of CRE loans, the largest tightening of standards occurred in loans for multifamily, a net share of 16.9% of domestic banks. Similarly, the largest decrease in demand of CRE loans occurred in construction and land development loans, a net share of 20.3% of domestic banks. Also, as shown in the figure above, the net tightening was a sharp increase in the already tightened lending standards of the previous quarter of 2018. The only percentage change that did not accentuate the change in the previous quarter was the decline in the demand for nonfarm nonresidential loans, which, although still negative, was a much smaller decrease.

The fourth quarter’s survey contained a set of special questions on banks’ outlook for 2019. For C&I loans, the selected sample of large banks in the U.S. reported that their lending standards to both large and middle-market firms and to small firms would remain unchanged, with about 11% to 12% reporting tightening their standards. 75% of banks also stated that their lending standards on CRE loans would remain unchanged from the previous quarter, but, on average, 25% of all banks, across all CRE loan categories, indicated that they would somewhat tighten in approving applications. The banks that were surveyed widely cited expected deterioration of collateral in 2019 as the reason for having expectations of tightening lending standards. Additionally, they also expected the quality of their loan portfolios to deteriorate and risk tolerance to diminish.

Tags: bank lending, banks, commercial and industrial loans, commercial real estate loans, federal reserve board, multifamily lending, nonresidential loans, Senior Loan Officer Opinion Survey, sloos