U.S. banks are tightening standards on business and credit-card loans at a rate comparable rate to 2008, according to the latest Senior Loan Officer Opinion Survey on Bank Lending Practices, which is published every few months by the Federal Reserve.
Banks are also tightening standards on every other category of loan, including auto loans and mortgages. The survey was conducted at the end of March and the beginning of April and largely reflects how banks have responded to the outbreak of the coronavirus.
Barron’s has been regularly tracking the Fed’s weekly data on bank balance sheets because it provides timely insights into how borrowers and lenders have been behaving in the midst of an unprecedented hit to economic activity. Companies tapped bank credit lines in March like never before, credit-card balances have plunged at the fastest rate on record since mid-March, and Paycheck Protection Program funds were distributed almost exclusively through smaller lenders.
These weekly figures show only what happened, however, rather than why. Balance-sheet data show that large banks stopped making new commercial and industrial loans in April, but they don’t indicate whether this was because businesses no longer needed the money or because banks tightened the credit supply. The Fed’s irregular survey fills that gap—and makes it clear that banks were the ones cutting lending, rather than the other way around. While demand for commercial and industrial loans rose both for smaller and larger companies, lenders tightened standards at the same rate as in 2008.
Across all categories of business lending, the Fed’s loan-weighted data show that supply was tightened dramatically even as demand was flat. Normally, supply and demand move in lockstep because banks and borrowers are responding to the same underlying economic conditions. In this case, however, the collapse in sales was so severe that businesses kept wanting to borrow even if they no longer had any desire to make new investments or acquire competitors.
Banks have also tightened standards on their loans to households. But even though standards are tightening at the fastest rate outside of the global financial crisis, the change in consumer credit supply is much less dramatic than what’s happened to businesses. This is mostly because banks have refrained from tightening standards on the main types of mortgages.
In other categories, things look different. The change in supply is particularly acute in credit cards. Unlike mortgages or auto loans, credit-card debt isn’t secured by collateral,…