Source: Golden Ten Data
For a highly financialized economy like the US, a relaxed credit environment and rising demand for loans are necessary to achieve economic growth, but this is not the case.
According to the results of the Senior Loan Officer Opinion Survey (SLOOS) released by the Federal Reserve on Monday, more US banks tightened loan standards in the first quarter, and demand for loans declined further.
Federal Reserve officials obtained the survey results last week, then decided to keep the policy interest rate within the range of 5.25% to 5.5%, and said they plan to maintain this interest rate as long as inflation needs to be reduced.
Tighter monetary policies usually relieve price pressure through credit channels, while rising borrowing costs reduce demand for loans. After a series of regional bank failures, the banking industry has generally tightened credit standards since the second quarter of 2022. The Federal Reserve raised the benchmark interest rate to a 20-year high last year to curb inflation, and high borrowing costs put pressure on businesses and households alike.
This process appears to continue into the first quarter, with the exception of commercial real estate loans, where there are signs of an improvement in the supply and demand of credit in this area.
Nationwide economist Ben Ayers wrote, “Although it appears that the Federal Reserve will maintain high interest rates until 2025, many consumers and businesses are still feeling the pressure of declining credit supply. This may lay the foundation for future weakening economic activity and make the economy more vulnerable to unexpected shocks.”
According to the survey, the net share of banks tightening commercial and industrial loan standards for large and medium-sized enterprises rose to 15.6% from 14.5% in the fourth quarter. A growing number of banks reported weakening demand for commercial and industrial loans, and the net ratio rose to 26.6%.
More and more banks are tightening loan standards
For households, more and more banks are tightening car loan standards, while the proportion of banks tightening standards for credit cards and other types of consumer loans is declining. Demand for home loans has deteriorated across all categories, with demand for car loans at its lowest level in a year.
However, as far as various types of commercial real estate loans are concerned, the proportion of banks that have tightened loan standards has fallen to its lowest level in two years. The proportion of banks reporting weakening demand for commercial real estate loans declined. According to foreign banks, demand for commercial real estate loans has generally risen.
Financial blog Zero Hedge reminds that without an easy credit environment and rising demand for loans, it is almost impossible for an economy — especially one that is highly financialized like the US — to grow.