Cash flow slowdown: U.S. banks turn cautious on lending in 2023

U.S. banks have tightened their lending standards for both businesses and households in the second quarter of 2023, and they anticipate maintaining this cautious approach for the rest of the year, according to a survey conducted by the Federal Reserve and cited by Bloomberg. The survey of loan officers revealed a multitude of reasons behind this tightening, including a volatile economic outlook, declining credit quality in loan portfolios, concerns about bank funding costs, and deposit outflows.

Federal Reserve Chairman Jerome Powell commented on the survey, acknowledging that the overall lending conditions are tight and continue to tighten. As a result of these conditions, the Fed took decisive action by raising interest rates to their highest level since March 2001.

Factors at play

Add WION as a Preferred Source

Among the factors contributing to the banks' increased caution are worries about the potential impact of legislative, supervisory, or accounting changes. Recently, the Federal Reserve and other regulators proposed a 16 per cent aggregate increase in capital requirements for banks with assets exceeding $100 billion, aiming to strengthen lenders against potential future challenges.

In response to the impending regulatory changes, some banks are already taking preventive measures, pulling back on lending or issuing warnings about potential future restrictions. The survey also revealed a decline in demand for new loans across various categories, affecting consumers, businesses, and commercial and residential real estate sectors.

Throughout the year, growth in U.S. bank lending has slowed, coinciding with the Federal Reserve's aggressive campaign to combat inflation by raising interest rates and subsequently increasing borrowing costs. As a result, banks are setting aside more funds for future loan losses, signifying their apprehension about worsening credit conditions.

Loan demand outlook in focus

Despite the tightening lending landscape, JPMorgan Chase's Chief Financial Officer, Jeremy Barnum, expressed optimism about reasonably robust loan card growth, particularly in auto loans. However, he also stated that the outlook for loan demand in other areas, including consumer and wealth sectors, is not as promising.

Slower bank lending can serve as a potential recession indicator, though it is not always definitive. According to Apollo's Chief Economist, Torsten Slok, the 'maximum negative impact' of tighter credit conditions on the gross domestic product (GDP) can take up to a year and a half to materialise.

While the possibility of a recession was a concern, the latest data from the Bureau of Labour Statistics has shown that the U.S. economy grew faster in the second quarter compared to the first. As a result, the growing consensus suggests that the immediate threat of a recession is diminishing.

Federal Reserve Chairman Jerome Powell echoed this sentiment, stating that the strong economic performance has instilled confidence in the country's economic outlook. Despite this optimism, the cautious approach taken by banks toward lending underscores the ongoing uncertainty surrounding the economic landscape.

(With Inputs from Agencies)