U.S. Financial Institutions’ Lending Standards Are Rapidly Tightening
2022-08-23
■Loan demand strengthened again, suggesting moves to secure working capital
■Lending standards are rapidly becoming stricter, increasing uncertainty about the future of the real economy and corporate performance.
The Federal Reserve Board (FRB) released its latest senior loan officer survey on August 1. For this survey, the FRB conducted interviews with U.S. financial institutions and returned the questionnaires on June 30. The interview included quarterly changes in lending criteria and funding requirements compared to three months ago. According to this, the loan demand DI (increase in demand as a percentage of all responses minus decrease in demand) for medium and large enterprises (with annual sales of more than $50 million) was 24.2, an increase from the previous survey in April ( 12.3). The recovery in investment demand, such as capital investment and mergers and acquisitions, has pushed up the demand for funds, and given the strong uncertainty in the future business environment, there is an increasing trend to accumulate liquidity.
In addition, the lending standard DI (the ratio of tightening to all responses minus the ratio of easing) was +24.2, a significant increase from the previous survey's data (-1.5). The data shows a change in the direction of strictness for five consecutive quarters and is in positive territory (over strict) for the first time in six quarters. Also, compared to the previous quarter, the contraction rate was 25.7, the largest since the July-September 2020 quarter (29.7) during the COVID-19 pandemic. Lending standards are tightening as fast as they were during the October-December 2008 quarter (25.9 points) when the financial crisis hit. This is in line with the fact that some major U.S. financial institutions have announced sharp declines in earnings for the April-June quarter and increased reserves to deal with bad loans due to the economic downturn and related losses.
In addition to functioning effectively as a leading indicator of capital investment, industrial production, and new employment, Lending Standard DI has shown to lead companies' operating margins by approximately three-quarters. According to data compiled by financial information firm Refinitiv， earnings per share (EPS) forecasts for S&P 500 companies in 2022 and 2023 are expected to rise 8.0% as of Aug. 19, down from early July (+9.5% and +9.3%)。 Amid recession fears, it's important to recognize the growing risk of downward pressure on share prices due to uncertainty about corporate earnings.