Tighter Bank Lending Expected Across 2023, Monetary Policy Report

The Federal Reserve’s semiannual Monetary Policy Report released this month claims the banking system remains resilient, however, concerns about liquidity positions, deposit outflows, and funding costs continue to plague the economy.

In the report, the Fed noted the recent banking failures over the course of this year sparked considerable resilience in uninsured deposits, declining fair values of long-duration fixed-rate assets due to rising interest rates, and poor risk management practices which led to the bank failures such Silicon Valley Bank.

Results from April 2023 Senior Loan Officer Opinion Survey on Bank Lending Practices show that banks expect to constrict lending standards over the remainder of 2023. Some banks report concerns about liquidity positions, deposit outflows and funding costs, according to the report.

The scope of the effects is likely to differ from borrowers, economic sectors, and geographic areas. For example, sectors dependent on bank credit, such as commercial real estate and small business sectors could experience larger ramifications.

The annualized rate for loan holdings came in at 5 percent for Q1, down from the previous quarter’s 9 percent.

Meanwhile, delinquency rates on bank loans remain near historical lows overall.

Read the full report, here.

Posed June 29, 2023.