By Ann Saphir
(Reuters) -U.S. banks reported tighter credit standards and weaker loan demand from both businesses and consumers during the second quarter, Federal Reserve survey data released on Monday showed, evidence that the central bank's interest-rate hike campaign is slowing the nation's financial gears as intended.
The Fed's quarterly Senior Loan Officer Opinion Survey, or SLOOS, also showed that banks expect to further tighten standards over the rest of 2023.
"The most cited reasons for expecting to tighten lending standards were a less favorable or more uncertain economic outlook, an expected deterioration in collateral values, and an expected deterioration in credit quality of CRE (commercial real estate) and other loans," the Fed said.
The Fed has raised interest rates by 5.25 percentage points since last March, and its surveys and hard data have shown banks have been slowing their lending in response.
Monday's SLOOS report - which Fed policymakers had in hand last week when they decided to deliver an 11th interest-rate hike after skipping one at their June meeting -- suggests credit tightening is ongoing.
But it does not point to a surge of the kind that some Fed policymakers had worried would occur after the banking turmoil in March and that might have made them skittish about further policy tightening ahead.
The survey showed a net 50.8% of banks tightened terms of credit last quarter for commercial and industrial (C&I) loans to medium and large businesses, up from 46% in the prior survey. For small firms, a net 49.2% of banks said credit terms were stiffer, versus 46.7% in the last survey.
Both measures fell short of the 70%-plus levels reached at the height of the pandemic in 2020; excluding that period, they were the largest increases since the Fed's first-quarter report in 2009, during the Great Financial Crisis.
Demand for C&I loans was down, with the net share of banks reporting strong demand from large and medium firms in the quarter at -51.6%, compared with -55.6% in the prior period.
(Reporting by Ann Saphir, Editing by Nick Zieminski)
