Banks tighten lending rules as economic worries grow

Lenders across the United States are making it harder for borrowers to qualify for loans, according to a survey released by the Federal Reserve on November 2. The report, covering the third quarter, indicates that banks are tightening credit standards in response to growing concerns about the economy's health. This shift places added pressure on specific sectors, including small businesses and commercial real estate, where credit conditions have deteriorated.

The data comes from the Senior Loan Officer Opinion Survey on Bank Lending Practices for October. The study collected responses from 61 domestic banks and 18 U.S. branches of foreign lenders. It measures reported standards and sentiment rather than actual loan volumes. The survey provides a snapshot of how credit conditions are evolving during a period of economic uncertainty.

In the commercial and industrial sector, standards for large and middle-market firms remained largely stable. However, banks reported tightening requirements for smaller businesses. Lenders also increased premiums on riskier loans for firms of all sizes. The report cited a less favorable economic outlook and worsening problems within specific industries as the primary drivers for this shift.

Commercial real estate has emerged as a major area of stress. Banks reported stricter standards across all major categories, including construction, nonfarm nonresidential properties, and multifamily housing. Demand for loans in these categories has also weakened. Lending to nonbank financial firms, such as private equity funds and mortgage intermediaries, is facing tighter rules despite growing demand for liquidity from these entities.

Household credit sentiment is mixed. Mortgage standards for the general population have remained broadly unchanged, with some easing for jumbo mortgages. In contrast, rules for subprime loans have become tighter. Banks reported weaker demand across all residential real estate loan categories. For credit cards, banks became more likely to approve super-prime and prime borrowers while becoming less likely to approve subprime applicants.

These changes coincide with a sharp rise in borrowing costs. The yield on the 10-year Treasury note reached an intraday high of 5.349% on October 5, the highest level since April 2002. Tiffany Wilding, a managing director and economist at PIMCO, noted that small businesses, the housing sector, and heavily indebted firms are facing tighter credit and higher costs. She attributed this partly to the AI investment boom squeezing other parts of the economy.

These signals align with recent data on household financial health. A CNBC and SurveyMonkey poll found that one in five Americans who rent or have a mortgage spends at least half of their pretax income on housing. A separate Federal Reserve report indicated that the percentage of families behind on loan payments at the end of 2025 reached almost 20%, up from about 12% in the previous survey conducted in 2022.