Fed survey: Banks tighten lending as riskier borrowers feel the squeeze

The Federal Reserve's newest Senior Loan Officer Opinion Survey, published Nov. 2, shows banks pulled back on lending in the third quarter — and the pain landed unevenly. Smaller businesses, riskier households and commercial property took the hardest hits. The survey drew on responses from 61 domestic banks and 18 U.S. branches of foreign lenders.

Large and middle-market firms escaped mostly unscathed: commercial and industrial lending standards for them were broadly unchanged. Small businesses weren't so lucky. Banks also raised premiums on riskier loans for firms of every size, pointing to a less favorable or more uncertain economic outlook and worsening industry-specific problems.

Commercial real estate is emerging as a pressure point. Standards tightened across construction and land development, nonfarm nonresidential and multifamily properties, and demand weakened in every CRE category. Banks also stiffened terms for nonbank financial firms such as private equity funds and business and mortgage credit intermediaries — right as those borrowers clamor for more liquidity. Lenders cited economic uncertainty and deteriorating financial strength among those borrowers.

Households got a mixed verdict. Mortgage standards stayed roughly flat, with some easing on jumbo loans and tighter rules on subprime, while demand softened across all residential real estate categories. On credit cards, banks said they're more likely to approve super-prime and prime applicants and less likely to approve subprime ones — a shift small banks are driving.

The backdrop: borrowing costs jumped. The 10-year Treasury yield, the benchmark for mortgages, auto loans and credit card debt, touched an intraday 5.349% on Oct. 5, its highest since April 2002, amid worries over rising U.S. debt. PIMCO managing director and economist Tiffany Wilding wrote Oct. 28 that higher government bond yields have catalyzed a broader repricing of credit risk, especially for lower-quality borrowers, and said small businesses, housing and debt-laden firms face tighter credit as the AI investment boom squeezes other parts of the economy.

Consumers are already feeling it. A CNBC and SurveyMonkey poll found one in five Americans who rent or hold a mortgage spend at least half their pretax income on housing, with 49% spending between 25% and 49% — well above the 28% to 30% lenders typically recommend. And the Fed's Survey of Consumer Finances, released Oct. 9, found nearly 20% of families were behind on loan payments at the end of 2025, up from about 12% in the 2022 survey.