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Lending to consumers has dropped as banks move quickly to further tighten credit standards after the failure of SVB, Fed survey says

A photo of a bank customer at the teller window.Dallas Fed survey finds ‘worsening business activity’ in late March.

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  • A Dallas Fed survey in March showed a drop in total loan volume and a tightening of lending standards. 
  • The survey was conducted after Silicon Valley Bank and Signature Bank collapsed. 
  • Banking outlooks “continued to deteriorate,” the regional Fed bank said.  

A credit crunch appears to be forming in the southwest region of the US economy, with the Dallas Fed’s survey conducted after last month’s two US bank failures showing lending to consumers has dropped, and credit standards elevated. 

Financial institutions also told the Fed district they expect more clients not to repay their loans under agreed-upon terms in the coming months. The Dallas Fed released its March survey this week.

“Credit standards and terms continued to tighten sharply, and marked rises in loan pricing were also noted over the reporting period,” the bank said. 

An index tracking overall loan volume fell to -18.3 in the survey conducted March 21 through 29 to which 71 financial institutions responded. The index was at 4.8 in February. The largest drop among loan types was in consumer loans, as that index fell to -33.4 from -17.8. 

At the same time, a gauge of credit and lending standards indicated lenders such as banks and credit unions further tightened access to funding. The index fell to -35.9 from -29.8 in February. 

Lenders generally have been making access to loans more difficult since the Federal Reserve began raising interest rates last year. 

The Dallas Fed’s survey is conducted twice per quarter, so it was already set to take the temperature of financial institutions in Texas, northern Louisiana and southern New Mexico before the abrupt collapses of Silicon Valley Bank and Signature Bank last month. 

A “crisis of confidence in our banking system” was created by the bank failures, the buyout of troubled lender Credit Suisse by UBS, and downgrades of several regional banks, one unnamed survey respondent told the Dallas Fed. “The additional macro impact of interest rate hikes has put the economy in a hard-landing recession, in my opinion,” they said. 

Banking outlooks “continued to deteriorate” in March, the Dallas Fed said. Its contacts told the bank they expect a contraction in loan demand and business activity and an increase in nonperforming loans over the next six months. 

Federal Reserve Chairman Jerome Powell last month suggested there could be a pullback in lending in the wake of the SVB and Signature Bank failures and seizures. 

“Events in the banking system over the past two weeks are likely to result in tighter credit conditions for households and businesses,” Powell said in a news conference about the central bank’s ninth consecutive rate increase.

A Dallas Fed chart shows a contraction in total loan volume in March 2023.A Dallas Fed chart shows a contraction in total loan volume in March 2023.

Federal Reserve Bank of Dallas

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