WASHINGTON – Banks are pessimistic about the quality of commercial and industrial lending in 2016, according to a report released Monday by the Federal Reserve Board.
The quarterly Senior Loan Officer Survey found that many banks already began tightening their lending standards for C&I and commercial real estate loans in the fourth quarter of last year, likely driven by declining prices for energy commodities like oil and gas.
"A majority of the domestic respondents that tightened either standards or terms on C&I loans over the past three months cited a less favorable or more uncertain economic outlook as well as a worsening of industry-specific problems affecting borrowers as important reasons, with some banks noting in their optional comments that energy-related industries, including oil and gas, were the concern," the report said.
The quarterly survey asks senior loan officers from banks with a range of sizes and specializations to either rate their outlooks for the performance of various categories of loans or report whether their banks have changed their lending practices regarding different loans. The survey results provide an anecdotal but nuanced gauge of the lending environment nationwide.
In addition to standard questions asked each quarter, the survey also generally includes so-called "special questions" – asking lending officers to report opinions on some or other specific area or subject in the lending market. The January report included special questions on bankers' outlooks on lending practices and conditions for 2016.
Significant numbers of respondents said that they expected the standards for construction and land development loans and multifamily property loans to tighten and for the number of originations of those loans to decrease commensurately. Most respondents said they expect interest rates charged on all business loans to rise over the course of the year, and significant numbers of foreign banks said they "expect to tighten their standards and expect spreads over their costs of funds to rise on all categories of business loans over 2016.
Economists and market participants have been holding their breath since the beginning of the year as the consistently low price for crude oil has begun to shake commodity-dependent economies in the developing world. The low energy prices have also taken a toll on regions of the U.S. that had recently been buoyed by oil production from hydraulic fracturing, including the Gulf Coast and the Upper Midwest.
Federal Reserve Vice Chairman Stanley Fischer said Monday that it is "difficult to judge the likely implications of this volatility," noting that if low commodity prices could lead to a slowing of the global economy. But Fischer also said that "we have seen similar periods of volatility in recent years that have left little permanent imprint on the economy."
Despite the uninspiring outlook for business lending, bankers reported more optimism in the residential mortgage market, with modest numbers of bankers expecting to ease their lending standards for government-sponsored enterprise-eligible and nonconforming jumbo residential mortgages in 2016.