Fed survey: Banks tighten lending standards as economic uncertainty grows

U.S. banks are becoming more cautious about lending as concerns grow over the economy's underlying health, according to the Federal Reserve's October Senior Loan Officer Opinion Survey on Bank Lending Practices, released Nov. 2. The quarterly survey collected responses from 61 domestic banks and 18 U.S. branches of foreign lenders, tracking changes in lending standards, terms and demand during the third quarter.

Small businesses and commercial real estate squeezed

Commercial and industrial lending to large and middle-market firms was broadly unchanged from the previous survey, but banks tightened standards for smaller businesses. Lenders also reported tightening standards for premiums charged on riskier loans for firms of all sizes, citing a less favorable or more uncertain economic outlook and worsening industry-specific problems.

Commercial real estate emerged as a pressure point. Banks tightened standards across construction and land development, nonfarm nonresidential properties, and multifamily properties, while demand weakened in all CRE categories.

Banks also tightened credit standards for nonbank financial firms, including private equity funds and business and mortgage credit intermediaries. The pullback came as demand for liquidity from private equity funds and business credit intermediaries grew, with lenders again pointing to economic uncertainty and concerns about deteriorating financial strength among nonbank financial borrowers.

Household credit mixed

Household credit sentiment was mixed. Mortgage standards were broadly unchanged, with some easing for jumbo mortgages but tighter rules for subprime loans. Banks reported weaker demand across all residential real estate loan categories. For credit cards, banks said they were more likely to approve applications from super-prime and prime borrowers and less likely to approve subprime borrowers, with small banks driving the subprime trend.

Higher borrowing costs

The tightening comes as borrowing costs rose sharply in the third quarter. The 10-year Treasury note yield, a key benchmark for mortgages, auto loans and credit card debt, reached an intraday high of 5.349% on Oct. 5, its highest level since April 2002, amid concerns over rising U.S. debt.

Tiffany Wilding, a managing director and economist at PIMCO, said tighter credit and higher borrowing costs are hitting small businesses, housing and heavily indebted firms as the AI investment boom puts pressure on other parts of the U.S. economy. In an Oct. 28 note, she attributed a broader repricing of credit risk, particularly for lower-quality borrowers, to higher government bond yields.

Signals of credit stress among riskier households align with a recent CNBC and SurveyMonkey poll, which found that 20% of Americans who rent or have a mortgage spend at least half their pretax income on housing, while 49% spend 25% to 49%. Lender guidance suggests spending 28% to 30% of income on housing.

A separate Federal Reserve report, the latest Survey of Consumer Finances released Oct. 9, found that almost 20% of families were behind on loan payments at the end of 2025, up from about 12% in the 2022 survey.

Source: CNBC Top News.