Senior Loan Officer Opinion Survey on Bank Lending Practices (April 2024)

Lending Standards Still Tight But Less than Before 

• The Federal Reserve's Senior Loan Officer Opinion Survey (SLOOS) on banks' lending practices showed that a fewer percentage of U.S. banks reported tighter lending standards for most loan categories in the first quarter of 2024 relative to the quarter prior. The only exceptions were Commercial and Industrial (C&I) loans with a similar net share, and auto loans with a higher share reporting having tightened. 
• For C&I lending, a higher (16%) percentage of banks reported tighter lending standards, and also (27%) reported a softening in loan demand. While these numbers aren't typically reported in periods outside times of economic weakness, they have considerably improved from a peak of (51%) and (56%) in the second quarter of last year.
• The April SLOOS included a set of special questions on banks’ expectations for changes in lending standards and demand for the Commercial Real Estate (CRE) sector. On balance, banks reported having tightened all queried CRE lending policies (including increasing spreads over bank’s cost of funds and the maximum loan sizes). Demand for CRE loans also softened relative to the quarter prior. 
• Demand weakened for most consumer loans, yet a higher net percentage of banks reported increased willingness to make consumer installment loans, such as auto and personal loans.             

Key Implications

• The economy performed exceptionally well over the past year, despite weaker loan growth at 2% (year-on-year). However, the fact that lending standards remain relatively tight shows that economic uncertainty remains somewhat elevated. Concerns around commercial real estate valuations remain particularly heightened.
• Lending standards have moved in a roller coaster fashion in recent years. But with today's report showing a smaller net percentage of banks tightening standards for most loan categories, it seems the worst is behind us ? as long as the risk to the outlook and inflation continues to cooperate.
• Historically, Fed policy decisions tend to lead bank's decisions to tighten or ease lending standards by a few quarters. With policymakers next move more likely to be a rate cut than a hike, an eventual reduction in borrowing costs should be supportive to future loan growth. Yet the recent firmer inflation and hiring readings have pushed this expectation of a Fed pivot to later this year.  

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