Banks Tighten Lending Standards Amid Economic Uncertainty, Loan Demand Declines 20%

U.S. banks have adopted a more cautious approach to lending to both businesses and households during the first quarter of 2025, according to the Federal Reserve's latest Senior Loan Officer Opinion Survey. The report underscores a tightening of credit standards and a weakening demand for loans, with the commercial and industrial (C&I) and commercial real estate (CRE) sectors being particularly affected.

The survey data reveals that a majority of banks tightened their C&I loan standards for enterprises of all sizes during the first quarter. Measures included increasing collateral requirements, reducing credit limits, and widening risk premiums. While some banks slightly eased risk premiums for small businesses, the overall credit environment remained tight. Banks cited several factors for this tightening, including economic uncertainty, concerns over regulatory changes, worsening industry-specific issues, and a reduced tolerance for risk.

Demand for corporate loans also declined, with many banks reporting a decrease in inquiries for new loans or increased credit lines. This decline was driven by reduced capital expenditures on equipment investments and mergers and acquisitions. In the CRE sector, most banks tightened standards for construction and development loans, as well as non-farm, non-residential property loans, while maintaining standards for multi-family residential loans. Large banks showed a slightly more lenient attitude towards multi-family and development loans, but other banks generally strengthened their scrutiny of all types of CRE loans.

Demand for CRE loans varied among banks. Some large banks reported a slight recovery in demand, while smaller banks noted weak demand. Foreign banks also saw an increase in demand for CRE loans. A special survey on changes in CRE loan policies over the past year showed that banks generally tightened key indicators such as loan-to-value ratios and debt service coverage ratios, and shortened the interest-only period. All surveyed banks reported tightening policies for office building loans due to concerns over future rental income, vacancy rates, property prices, and default rates, as well as a lower overall risk tolerance.

In the residential mortgage sector, banks maintained stable standards for most home loans, with slight tightening for non-compliant jumbo loans. However, demand for most types of home loans weakened, particularly for non-GSE compliant loans and government-supported loans. The exception was home equity lines of credit, which saw a slight increase in demand despite stable lending standards.

In the consumer lending sector, some banks tightened standards for credit card loans, particularly in terms of credit limits. Standards for auto loans and other consumer loans remained largely unchanged. Consumer demand for credit card and other consumer loans weakened, while demand for auto loans remained steady. The overall trend indicates a cautious approach by banks in response to economic uncertainties and regulatory concerns, leading to a tightening of credit standards and a decline in loan demand across various sectors.