Rate increases did not impact credit card consumers severely in the first couple of rounds, as the prime rate increased from the COVID 3.25% standard set in place for two years as the economy went through the global pandemic. Now, after ten increases over 26 months, lenders are getting nervous. The prime interest rate hit 8.25% in May 2023, a whopping 500 basis point hike now costing consumers a lot of money. Credit card loans are not the only household credit issue affected. Rising rates also affect mortgages, sometimes auto loans, and many consumer loans.
The Federal Reserve surveys lenders to assess lending sentiment in a quarterly survey called SLOOS, Washington-speak for the Senior Loan Officer Opinion Survey. The purpose of SLOOS is to get a pulsebeat on lenders. Are they loosening up standards? Or are they tightening up requirements? Credit policies and underwriting strategies ebb and flow as lending officers adjust their risk tolerance to market conditions.
What is interesting in the current survey is not that banks are tightening their lending standards—it is a no-brainer when household budgets fall under stress when interest rates rise or inflation surges. But now, with bank failures such as First Republic Bank, Silicon Valley Bank, and Signature Bank, concerns about liquidity are helping to force banks into a tightening position.
Says the Fed on Credit:
“Banks most frequently cited an expected deterioration in the credit quality of their loan portfolios and in customers’ collateral values, a reduction in risk tolerance, and concerns about bank funding costs, bank liquidity position, and deposit outflows as reasons for expecting to tighten lending standards over the rest of 2023.
In a set of special questions, the April SLOOS asked about banks’ reasons for changing standards or terms for loans across all loan categories over the first quarter. Overall, major net shares of banks reported that a less favorable or more uncertain economic outlook was an important reason for tightening, as well as a reduced tolerance for risk, deterioration in customer collateral values, and concerns about banks’ funding costs and liquidity positions.
In comparison to the largest banks, mid-sized and other banks more frequently cited concerns regarding their liquidity positions, deposit outflows, and funding costs as reasons for tightening. Major shares of mid-sized banks cited the economic outlook, reduced tolerance for risk, concerns about the bank’s liquidity position, deterioration in collateral values, deterioration in the credit quality of loan portfolio, bank funding costs, and deposit outflows as reasons for tightening. Major shares of other banks cited the economic outlook, bank funding costs, reduced risk tolerance, collateral values, concerns about their liquidity position, and deposit outflows as reasons for tightening.”
What We Think
In short, consumers may not be too happy about borrowing more, but lenders do not feel too good about lending right now, either. Right now, the prime rate has not been that high since 2001. The baseline rate hit a lifetime peak at 13.00% in June 1994, so we are still almost 500bps away from that, so expect to see some continued increases in the road ahead. And even tighter lending standards to come.
Overview byBrian Riley, Director of Credit /Co-Head of Payments at Javelin Strategy & Research.
