US banks pull back on loans as Fed hikes rattle the financial sector

Nearly half of US banks are tightening their lending standards, according to a new quarterly survey from the US Federal Reserve Bank.

With the economy sending mixed signals about a potential recession, investors and policymakers are paying close attention to bank lending. The less lending that banks do, the more likely that firms of all stripes are to cut back on investment, which in turn slows the growth of employment and the economy overall.

The latest data come from the Federal Reserve’s senior loan officer opinion survey (SLOOS). Senior loan officers oversee underwriting at banks or other financial institutions; the Fed talked to officers at 65 banks between March 27 and April 7.

Since March 2022, the Federal Reserve has increased its benchmark interest rate from 0% to a range of 5% to 5.25% in an effort to battle elevated inflation.

Banks are gradually raising the cost of business loans

Today, 46% of the banks consulted by the Fed have raised the cost of financing for commercial and industrial loans (C&I) to mid-to-large businesses as of the first quarter this year, which is a slight increase from 45% in the survey from the previous quarter. C&I loans are important for helping businesses expand their operations and finance new equipment among other things.

The monetary policy committee at the Fed had access to the results of this survey before they made their decision to hike by 25 basis points, so the new data is unlikely to impact whether the Fed pauses or hikes again in June.

Not only are the Fed’s interest rate hikes raising the cost of capital for banks, but the recent spate of regional bank failures—Silicon Valley Bank, Signature Bank, and First Republic Bank—has also rattled public bank stocks and made lenders more skittish as they fret about potential deposit flight. This is the first Fed survey of bank lending to be released since these banks failed.

“Although banks of all sizes cited the same reasons for tightening, mid-sized and other banks more frequently cited the bank’s liquidity position,” the Fed wrote in its SLOOS report.