Credit is getting tighter, and it’s only a matter of time before it chokes growth, economist says

Key details: Banks tightened standards on loans to firms of all sizes. Tightening was accomplished in premiums for riskier loans, spreads of loan rates over the cost of funds and costs of credit lines.

There was weaker demand for loans from firms of all sizes. Many banks reported that the number of inquiries from potential borrowers dropped sharply.

Demand also weakened for consumer loans.

Asked why they had tightened standards for all loan categories, banks most frequently cited a less favorable economic outlook, reduced tolerance for risk, deterioration in credit quality of loans and concerns about funding costs.

Real estate: Banks tightened lending standards across all categories of residential-real-estate loans other than government residential mortgages. Demand weakened for all home loans.

Major net shares of banks reported tightening standards for all types of commercial-real-estate loans. These banks also reported weaker demand.

Big picture: The tightening of bank standards has been going on since mid-2022 but only received widespread attention with the collapse in spring 2023 of Silicon Valley Bank, Signature Bank and First Republic Bank, according to Richard Moody, chief economist at Regions Financial Corp.

That tightening was expected to hit the economy harder as the year progressed.

Moody said that bank lending, on a year-over-year basis, had already fallen below 4% in October, a very weak number historically.

The Fed’s interest-rate policy statement last week said that “tighter financial and credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation.”

What are people saying? Economists don’t think the tightening of lending has ended. Many worry about a potential credit crunch that could push the economy into a recession next year.

“It’s only a matter of time before constrictive credit conditions choke off GDP growth,” said Oren Klachkin, an economist at Nationwide.

Market reaction: Stocks
DJIA

SPX
were lower in afternoon trading on Monday, while the 10-year Treasury yield
BX:TMUBMUSD10Y
rose to 4.66%.