The report on Monday shows requirements for receiving a loan have become more difficult for ... [+]
Banks are concerned over the current and near-term conditions, according to the Federal Reserve’s Senior Loan Officer Opinion Survey (SLOOS). The report on Monday shows requirements for receiving a loan have become more difficult for commercial and industrial loans. Families will also face challenges and higher costs for mortgages, home equity lines of credit and credit cards.
The loan officers anticipate problems to continue into 2024. The survey cites concerns about diminished expectations for economic growth, changes in lending standards, terms and business and household demand for loans, concerns over deposit outflows and reduced risk tolerance.
The SLOOS is a quarterly survey conducted by the Fed that collects data about bank lending practices and credit conditions to gauge a pulse on the economy. The survey is a leading indicator of how bank credit will likely change and offers insights into the economy’s future direction, which can inform monetary policy decisions.
“There has been an ongoing tightening of lending conditions. And that is part of the process by which monetary policy works,” United States Treasury Secretary Janet Yellen told CNBC. “The Fed is aware that tightening of credit conditions is something that will tend to slow the economy somewhat. And I believe they are taking this into account in deciding on appropriate policy,” Yellen added.
With tighter restrictions on business and personal loans, the economy will contract. As businesses are unable to procure funding, they will likely need to streamline costs, which will include conducting layoffs. These actions align with Powell’s policy to degrade the economy and labor market to beat inflation. The rationale behind the Fed’s policy is that if more people lose their jobs, they won’t spend as much money, and inflation will start easing downward.
What The SLOOS Says
The survey covers commercial and industrial loans and residential real estate loans. Due to economic conditions, banks are expected to tighten standards across all loan categories and see a deterioration in the credit quality of their loan portfolios and customers' collateral values. There will also be a reduction in risk tolerance and concerns about bank funding costs.
Banks are tightening credit terms and seeing a drop in loan demand. The survey shows that 46% of banks tightened credit terms for a key category of business loans for medium and large businesses compared with 44.8% in the prior survey in January. For small firms, conditions were slightly more stringent, with 46.7% of banks saying credit terms were stiffer now versus 43.8% in the last survey.
What Will Happen Next
In a press conference last Wednesday, Powell announced that the Fed would raise interest rates for the 10th consecutive time to a range of 5% to 5.25%. In his quest to dampen the economy to bring down record-high inflation, there will be collateral damage, including job cuts.
When rates rise, it amounts to an additional tax on households and companies. The extra costs deter spending for both consumers and corporations. As companies feel the effects of higher borrowing costs, they tighten their belts, cut costs and lay off workers. This is an intended consequence of Powell’s anti-inflation quest.
A tweet thread by Nick Gerli, a management consultant focused on real estate and lending, suggests that a significant slowdown in lending in 2023 could lead to layoffs and bankruptcies.
Goldman Sachs, Capital One, Bank Of America, Wells Fargo, Morgan Stanley, New York Community Bank and PacWest Bancorp are just some banks that have announced layoffs throughout the 2022 and 2023 economic downturn.
The implosion of Silicon Valley Bank, Signature Bank and Silvergate Bank, the acquisition of First Republic Bank by JPMorgan and UBS’s takeover of Credit Suisse will cause significant job losses. Other banks will plan to downsize as well as they try to lower costs. The layoffs are coming at a time when many banks are facing tighter profit margins and a more uncertain economic outlook.
Layoffs in the banking industry will significantly impact already-reeling small and regional banks. The share prices of several financial institutions have plunged as fears spread. PacWest, Western Alliance, Zions Bancorporation and other small and regional banks have been the focus of hedge fund short selling, with allegations that they are in dire financial straits.
