Fewer Banks Are Tightening Credit, Especially for Small Businesses

Fewer banks say they are making it tougher for businesses to borrow, a survey released Monday by the Federal Reserve showed.

Bank lending is the lifeblood of the American economy and lending standards are one of the main arteries through which the Federal Reserve’s monetary policy influences the growth of the economy, the level of employment, and the pace of inflation. Earlier this year, banks were aggressively tightening standards and demand for loans was rapidly declining in reaction to higher interest rates and an anticipation of a sluggish economy or outright recession.

A total of 35.6 percent of banks said they had tightened lending standards with large and medium-sized businesses over the last three months, according to the Fed’s quarterly Senior Loan Officer Opinion Survey.  The share saying they tightened “considerably” came in at 3.4 percent while the share saying their standards were somewhat tighter was 32.2 percent. Most banks—62.7 percent—said they had not tightened standards and 1.7 percent said they had eased somewhat.

That’s a significant slowdown in tightening from the second quarter of this year, when 50.8 percent of banks reported tightening. In that survey, 4.8 percent reported that they had tightened considerably and 46 percent reported some tightening. No banks reported loosening and 49.2 percent reported they had not changed standards.

It’s lower even than the first quarter of this year, when around 46 percent of banks said they had tightened lending standards for median and large businesses.

For smaller businesses, those with annual sales of less than $50 million, the shift away from tightening was even more marked. The share saying they had tightened fell to 30.4 percent, down from 49.2 percent. At the start of the year, around 47 percent said they were tightening standards on smaller companies.

Banks were less likely to report that demand for loans from larger businesses fell in the third quarter. For large and medium businesses, 40.7 percent of banks said demand for business loans had fallen. A quarter earlier, 59.7 percent of banks reported falling demand. Loan demand from smaller businesses edged down a bit.

For consumers, the changes were less significant. The share of banks saying they were tightening standards for credit cards fell from 36.4 percent to 33.3 percent, although the share saying they had increased standards a lot rose from zero to 2.2 percent. The share saying they were tightening for auto-loans remained unchanged at 16.7 percent, although the share saying they had tightened considerably increased from zero to 2.1 percent.

More banks tightened standards on many types of resident mortgages. For example, 12 percent of banks said they had somewhat tightened standards on mortgages eligible to be sold to government-sponsored entities like Fannie Mae and Freddie Mac. In the prior quarter, only 5.4 percent reported tightening.

The results of the survey suggest that the effect of the Fed’s monetary policy tightening has faded in the second half of the year, which could spark concerns about inflation picking up steam. The Fed has not raised rates since July.