Banks Expect To Tighten Business Lending Standards in 2016
May 4th, 2016 @ 9:31 AM by Amber Nelson
A significant share of bankers expect to require higher standards on business loans during the rest of 2016, according to a new survey from the Federal Reserve, a sign that the overall economy could slow in coming months.
In the April 2016 Senior Loan Officer Opinion Survey on Bank Lending Practices, the Fed reported that in April 11.6 percent of banks tightening their standards for commercial and industrial (C&I) loans – basically all types of business loans – to large and middle market companies and 5.8 percent held small businesses to higher standards. That was even as demand for business loans increased during the same time.
And yet when asked if they plan to tighten lending standards for the rest of the year, 20 percent of banks said they would raise lending requirements on business lending and 90 percent said they would do the same for commercial mortgage loans.
If that is true, that would be major shift from the current trend and could negatively impact economic growth. If businesses have a harder time qualifying for loans, they may also have less capital for expansion and hiring, with job creation numbers suffering through the next several months.
As to why banks are tightening their standards, it seems to be a product of the decline of energy industries in several parts of the country. As oil prices have dropped over the past few months, energy companies have initiated lay-offs and other cost-cutting measures. Banks reported that they have seen a decrease in the credit quality of business and mortgage loans made to those in areas dependent heavily dominated by the energy sector. They also noted a drop in the credit quality of auto loans in those regions as well.
It is likely that banks are predicting the energy industries will not see substantial improvement before the end of the year and are planning accordingly to tighten standards in order to minimize loan losses. Unless other sectors of the economy start doing well enough to offset those energy industries declines, businesses may find it more difficult to access borrowed capital .
Amber Nelson is a seasoned mortgage industry writer and a regular contributor to Loan.com and Mortgage101.com.