The Federal Reserve released two separate reports this week that point to continuing financial risks for U.S. economic growth throughout 2023. The reports suggest that an acceleration of tightening lending standards and a contraction in credit could contribute to an even greater slowdown in the nation’s economic activity over the next several quarters.
The two reports include the Fed’s quarterly senior loan officer survey and its semi-annual Financial Stability Report. Both reports are closely watched by banking sector analysts and forecasters.
Continuing financial risks as lending tightens
Industry experts have noted that lending standards were tightening even before the recent collapse of three notable banks. However, the new loan officer survey suggests that the tightening trend is likely to continue. And as credit continues to contract, that will increase costs for business and individual lending, putting further pressure on growth.
Also noteworthy is that bank officers reported less credit demand in the first quarter of 2023. That decrease in demand was seen in real estate, auto loans, and commercial lending. According to the report, commercial lending demand declined to lows not seen since 2009.
The bank officials also noted that their loan standard tightening was prompted by several key factors. Many of them reported declining loan portfolio credit quality. In addition, they cited increased deposit outflows, lower tolerance for risk, and renewed liquidity and funding concerns.
A warning about commercial property price decreases
The most recent Financial Stability Report also included a cautionary note from the Federal Reserve. According to regulators, there are concerns about significant declines in commercial property values. As the Fed notes, banks hold roughly 60% of those commercial property loans. Any material decline in commercial property prices poses a significant risk of credit loss for those banks, increasing the nation’s financial risks even more.
Financial risks
Two new Federal Reserve reports highlight the continuing financial risks confronting the banking sector and the U.S. economy.
Financial risks, Federal Reserve, banks, U.S. economy, commercial property values, lending, Financial Stability Report, loan officer survey, banking crisis
