October SLOOS Update - Senior Loan Officer Opinion Survey

Context 

The Senior Loan Officer Opinion Survey (SLOOS) is a survey conducted by the Federal Reserve of 80 domestic banks and 24 branches of international banks to analyze bank lending practices for businesses and households. The report is seen by investors as an indicator of economic health and trends in banking. Generally, there are four SLOOS reports per annum; this October SLOOS, being the last of 2023, represents its penultimate quarter. 

October Commentary 

This report noted a market contraction in C&I (Commercial and Industrial) and CRE (Commercial Real Estate) loans as respondents saw demand fall and standards tighten. Across the consumer spending landscape, banks reported tightening lending standards and reduced demand for all residential real estate loan categories, home equity lines of credit, credit cards, auto, and consumer loans. 

Corporate

The survey reported that important factors that caused reduced demand for C&I loans were less investments in Plant Machinery & Equipment, PME, and “decreased financing needs for inventories, accounts receivable, and mergers or acquisitions” and lower precautionary cash requirements. The report also shows larger banks tightening less than other, smaller banks. 

Consumer 

Tightening lending standards and reduced demand in consumer lending can have significant market implications, such as dampening consumer spending, which is a critical determinant of economic growth. Notable sectors like housing and automotive are heavily reliant on consumer financing so tightening of lending standards is likely to result in economic cooling. The reduced demand that banks are seeing underscores a shift in consumer behavior towards conservative borrowing tendencies in the face of economic uncertainty. 

Implications

More stringent lending practices were resultant of what surveyed banks see as deteriorating economic conditions, decreasing confidence in the value of collateral and credit quality, lower liquidity in the secondaries markets, and generally reduced risk tolerance. 

Increasing yields, as shown by the quarter ending in September for 10-year Treasury Yields, explain the slowdown apparent in this report. As the cost of borrowing increases, both borrowers and lenders become increasingly cautious, and aggregate demand subsequently decreases. This uptick in caution is due to increased costs of borrowing (borrower side) and elevated risks of default (lender side), among other factors, including broader economic conditions, chiefly monetary tightening. As the Fed tries to bring inflation under control, the credit market is dutifully contracting. The SLOOS data says that credit conditions are tightening, which indicates economic slowdown is accelerating as banks prepare and pad their balance sheets for an economic downturn.