What are bank lending standards?

Bank lending standards are the requirements and conditions that commercial banks impose on borrowers when making loans. These include credit score thresholds, income documentation requirements, loan-to-value ratios, collateral requirements, interest rate spreads, and covenant packages. When banks tighten standards, they approve fewer loans, require more collateral, and charge wider spreads. When they ease standards, credit becomes more accessible and cheaper.

The Federal Reserve's Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS) is the primary tool for measuring changes in lending standards. Conducted quarterly, SLOOS asks senior loan officers at approximately 80 large domestic banks and 24 US branches of foreign banks whether they have tightened or eased standards and terms on various loan categories over the preceding three months. The results are reported as net percentages: a reading of +40% means 40% more banks tightened than eased.

SLOOS data has strong predictive power for economic activity. Tightening lending standards precede slowdowns in business investment, consumer spending, and GDP growth by 2-4 quarters. The mechanism is straightforward: when banks restrict credit access, businesses cannot fund expansion and consumers cannot finance purchases, directly constraining demand. Historically, SLOOS tightening readings above +40% for commercial and industrial (C&I) loans have been associated with recessions within the following year.

The 2023 banking stress following SVB's failure produced a significant tightening in SLOOS readings, as banks became more cautious about credit risk and conserved capital. This credit tightening acted as a de facto additional interest rate hike, complementing the Fed's explicit rate increases. The Fed has cited SLOOS tightening as a reason it can be patient with the policy rate, because the banking channel is doing some of the tightening work independently of rate policy.