Borrowing Will Get Tougher Before it Gets Easier, Banks Say

Loan manager with laptop meeting with client in bank branch office

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Borrowing money for a household or business is getting more difficult, and credit will be even harder to come by in the near future.

The Federal Reserve's latest survey of loan officers, released on Monday, showed that most banks expect to keep raising lending standards in coming months, after tightening credit across the board in the three months preceding April. 

"That will starve firms and households of credit and help push the economy into recession in the second half of this year," Michael Pearce, lead U.S. economist at Oxford Economics, wrote in a commentary.

Banks can tighten credit in multiple ways. Lenders can require more collateral or restrict the size of lines of credit, for example.

Historically, as credit becomes harder to come by, the unemployment rate rises. The correlation suggests businesses employ fewer people when credit isn't available.

"The bad news is that less availability of credit, combined with the soaring cost of it in the past year, does raise the risk of a recession," wrote BMO Senior Economist Sal Guatieri in a commentary before the survey was released. "The good news, so to speak, is that it will also dampen the inflation flames and is one big reason the Fed is signaling a probable pause in the tightening cycle, which may at least limit the chance of a harder landing for the economy."

As bankers grow less willing to lend, borrowers are also getting cold feet. Bankers reported weaker demand for commercial and industrial loans and real estate loans for both commercial and residential properties.

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  1. The Federal Reserve. "Senior Loan Officer Opinion Survey on Bank Lending Practices."

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