US banks tightening lending standards on sector worries

US banks tightened lending standards in the first few months of 2023, and expect this to continue over the rest of the year, said a Federal Reserve survey released on Monday.

The report, which is closely watched on Wall Street, comes as the financial sector contends with deposit outflow worries on the back of turmoil after the high-profile collapse of Silicon Valley Bank (SVB) and Signature Bank in March.

In recent weeks, shares of midsized banks suffered brutal trading days while investors remained on edge for a repeat of earlier episodes in which deposit runs precipitated or played a significant role in bank failures.

Asked about their outlook for lending standards over the rest of 2023, "banks reported expecting to tighten standards across all loan categories," the Fed said on Monday.

Among the most frequently cited reasons included an expected deterioration in credit quality of loan portfolios and in customers' collateral values, alongside reduced risk tolerance, found the senior loan officer opinion survey on bank lending practices.

Other reasons included "concerns about bank funding costs, bank liquidity position, and deposit outflows," the survey added.

In the first quarter, respondents reported tighter standards and weaker demand for various types of loans to businesses and households, the report added.

"In general, the tightening in standards for business loans was more frequently reported across the mid-sized banks," the report said.

On commercial and industrial lending, midsized and other banks more often cited their liquidity positions and issues such as heightened concerns about the impact of legislative changes.

And among banks' worries were an uncertain economic outlook.