A new Federal Reserve survey shows that banks are doing far less borrowing from high-interest rates—which will no doubt lead to an economic slowdown.
- The Fed reported Monday the results of its Senior Loan Officer Opinion Survey.
- In the survey, the Fed notes that banks are responding to higher interest rates, less risk tolerance, a less optimistic view of the economy, deteriorating collateral values, liquidity concerns, and industry problems.
- 46% of banks are responding by enforcing stricter lending standards and expect to enforce them for the duration of this year.
- 55.6% of banks are similarly reporting lower demand for loans in quarter one, the highest rating since the 2009 financial crisis.
- The survey comes following the Fed raising interest rates last week for the 10th consecutive time in 14 months.
Why It’s Important
The survey results reflect the banks’ reactions to the Fed’s ongoing tightening policies, showing that consumers are seeing the effects of high interest rates and that the economy is slowing down as planned in an attempt to tame inflation. Banks are taking the brunt of the effects, costing many of them heavily.
The results are also coming in the aftermath of the tumultuous collapses of First Republic Bank, Silicon Valley Bank, and Signature Bank—three of the largest bank collapses in U.S. history. First Horizon Bank, PacWest Bancorp, and Western Alliance faced similar concerns last week.
“This confirmation of tighter lending standards pushes recession odds even higher. Nothing is a guarantee, but these odds are hard to argue against,” says Piper Sandler & Co. strategist Michael Kantrowitz.
“Big picture, whether you look at loan supply or loan demand, the [survey] appears to paint a grim picture about the outlook,” says JPMorgan Chase economist Michael Feroli.
“The impact of tightening credit to small businesses, which are very large employers, and banks are major providers of credit to small and mid-sized businesses. So depending on how long this tightening and how significant this tightening is, has the potential to have material impacts on how fast the economy grows,” says Moody’s SVP Warren Kornfeld.