This month, Principal Credit Analyst Rob Hajduch takes a closer look at the Federal Reserve Senior Loan Officer Opinion Survey
Rob Hajduch, Principal Credit Analyst
The Federal Reserve conducts periodic surveys of approximately 80 large domestic banks and 24 U.S. branches and offices of foreign banks to gauge changes in lending standards and terms as well as measure demand for credit among businesses and households. Generally conducted quarterly, the most recent results (Q2:20) indicate a sharp tightening of credit standards across all loan categories following the pandemic's outbreak during the first quarter.
Tighter lending standards are currently being applied universally to all consumer loan categories that encompass residential mortgages, credit cards, auto loans and other installment loans. The tightened standards have broadly manifested as adjustments to credit limits (lower) and minimum credit scores (higher) and are in response to the current macro-economic dislocations. Banks were presented with additional questions in the most recent survey to measure current lending standards relative to the midpoint of the range over which lending standards have fluctuated since 2005. The survey found that current lending standards across all loan categories were at the tighter end of the range since 2005.
That lending standards are this tight is noteworthy as loan asset quality to date has remained remarkably strong and the banking sector is currently sitting on record levels of deposits. This heightened level of conservativism reflects uncertainty regarding consumers' actual financial condition given exceptionally high levels of unemployment and the volume of borrowers entering into forbearance programs earlier this year. Federal stimulus programs, including enhanced unemployment benefits, have delayed recognition of impairment that typically would have begun to occur by this point in the economic cycle as consumers have generally continued to service their debt. The expiration of enhanced unemployment benefits and the lack of progress toward a replacement in Congress are forcing the banking sector to prepare for what seems to be an eventual reckoning.
Finally, the survey found an almost universal weakening in loan demand across all commercial and consumer lending categories, with the sole exception being for first-lien residential mortgages. This uncharacteristic alignment of low loan demand, together with tightened lending standards, not only distinguishes it from the Global Financial Crisis but might represent one of the rare silver linings to this current cycle. Consumer de-levering began early this time around and banks not only have been reinforcing their balance sheets since the downturn's initial stages; they entered from a clear position of strength. Accordingly, consumers will not have to dig out from beneath the mountains of debt which was common following the 2008 cycle. Banks will be better positioned to lend as the recovery gains momentum and demand reemerges.
Board of Governors of the Federal Reserve System, July 2020 Senior Loan Officer Opinion Survey on Bank Lending Practice, August 3, 2020