Lending standards tightened as loan demand weakened in Q2

Banks tightened credit standards for most loans during the second quarter of the year amid weaker demand for both business and household lending, according to the Federal Reserve Senior Loan Officer Opinion Survey..Banks especially tightened standards for commercial and industrial loans to small firms through increased collateral requirements, higher premiums on risky loans and tighter covenants, according to the report. Demand for C&I loans declined significantly, with banks citing reduced business investment and less financing activity for mergers, acquisitions and inventory. “Among banks that reported tighter standards and terms for C&I loans, major net shares cited a less favorable or more uncertain economic outlook; increased concerns about the effects of legislative changes, supervisory actions, or changes in accounting standards; and the worsening of industry-specific problems as important reasons for doing so,” according to the Federal Reserve. Lending standards for commercial real estate loans tightened for construction and nonfarm nonresidential properties. Demand for CRE loans weakened, though large banks reported some pockets of stronger interest.Consumer lending was mixed. Standards tightened for credit score requirements. Demand weakened for credit card and general consumer loans, but increased for auto loans. Standards for auto and other consumer loans were unchanged.Banks left standards unchanged for residential mortgages, but demand for most home loan types declined. Banks saw stronger demand for home equity lines of credit, despite tighter lending standards for HELOCs.Most banks reported that lending standards remained relatively tight historically for C&I, CRE, residential and consumer loans, albeit less restrictive than last year. “Significant net shares of banks reported standards on the tighter ends of their ranges for subprime credit card loans, subprime auto loans and other consumer loans, while moderate net shares of banks reported standards on the tighter ends of their ranges for prime credit card and auto loans,” according to the Federal Reserve.