Fed Survey: Softening Demand for Corporate Loans in Q1 2025, Bank Credit Policies Continuously Tightening

The "Senior Loan Officer Opinion Survey on Bank Lending Practices in April 2025" released by the Federal Reserve this week shows that in the first quarter of 2025, U.S. banks continued to take a more cautious stance in lending to businesses and households. The report indicates that overall business credit standards are tightening, with weak loan demand, particularly in the areas of commercial and industrial (C&I) loans and commercial real estate (CRE) loans. Survey data shows that most banks tightened C&I loan standards for large, medium, and small-sized businesses in the first quarter of 2025, while also strengthening risk controls, such as increasing collateral requirements, compressing credit limits, and raising risk loan spreads. For small businesses, some banks even slightly relaxed spread requirements, but the overall credit environment remains tight. As for the reasons for tightening loan policies, banks generally point to uncertainties about economic prospects, concerns about regulatory changes, worsening industry-specific issues, and a decrease in risk tolerance as important factors driving them to tighten credit. In terms of demand, the majority of banks report varying degrees of decline in demand for business loans, especially due to reduced inquiries for new loans or increased credit limits as a result of decreased customer spending on capital expenditures such as equipment investments and merger activities. In the area of commercial real estate loans, most banks tightened standards for construction development loans and nonfarm nonresidential property loans, while maintaining standards for multi-family residential loans. It is worth noting that large banks have shown slightly more leniency towards multi-family and development loans, while other banks have generally increased scrutiny of all types of CRE loans. In terms of demand, banks' feedback on CRE loan demand has been mixed. Some large banks report a slight uptick in demand for CRE loans, while smaller banks indicate weak demand. Foreign banks, on the other hand, show an increasing trend in demand for CRE loans. Furthermore, a special survey on changes in CRE loan policies over the past year shows that banks have generally tightened core indicators such as loan-to-value ratios and debt service coverage ratios, and have shortened interest-only periods. Particularly in office building loans, all surveyed banks indicated varying degrees of tightening in all evaluation policies. The main reasons for tightening office building loans include concerns about future office rents, vacancy rates, property prices, default rates, and a decrease in overall risk tolerance. In terms of household loans, banks have maintained stable standards for most residential real estate loans, with only slightly tighter standards for some non-compliant large loans. Meanwhile, banks report that demand for most housing loans has weakened, especially with significant declines in demand for non-GSE compliant loans and government-supported loans. The only exception is home equity lines of credit, where banks have not only maintained lending standards, but also report a slight increase in demand for this type of loan. In consumer loans, some banks have slightly tightened standards for credit card loans, especially in terms of stricter restrictions on credit limits. Standards for auto loans and other consumer loans have remained largely unchanged. In terms of demand, consumer demand for credit cards and other consumer loans has weakened, while demand for auto loans has remained relatively stable.