As global economies navigate the aftermath of inflationary pressures, fiscal strains, and evolving financial landscapes, banks in both the United States and the euro area are increasingly pulling back on credit. This shift reflects a broader caution among lenders as they grapple with mounting risks and uncertainty.

Macroeconomic backdrop

The Federal Reserve and the European Central Bank cut policy rates by a combined 100 basis points toward the end of 2024, aiming to support growth and temper inflation. Yet despite these cuts, bond yields have been rising by nearly a full percentage point in many markets.

Rising yields are driven by expectations of sustained growth, persistent inflation concerns, and expanding fiscal deficits. In this environment, banks face economic uncertainty that weighs heavily on their willingness to extend new credit.

US loan standards and demand

The Federal Reserve’s Senior Loan Officer Opinion Survey (SLOOS) for Q4 2024 revealed a sharp pullback in lending appetite. For commercial and industrial (C&I) loans to large and middle-market firms, 12.5% of banks reported tightening lending standards, up from just 4.8% in the previous quarter.

• C&I loans: Demand rose for large and mid-sized firms but remained flat for small businesses, reflecting divergent growth prospects.
• Credit cards: Already conservative, banks tightened limits further, with 17% reporting weaker demand as households cut back.
• Residential mortgages: Only a small fraction of banks eased standards as mortgage rates climbed, causing demand to dip sharply by late 2024.

Standards for auto loans and home equity lines of credit (HELOCs) held steady, with a slight uptick in lending following natural disasters. Meanwhile, smaller banks eased credit for loans under $50 million in annual sales, suggesting lower risk tolerance has not uniformly applied across institutions.

In the commercial real estate sector, standards tightened for construction and land development loans as well as nonfarm nonresidential properties, even as multifamily lending remained stable.

Euro area lending trends

The ECB’s Bank Lending Survey for Q1 2025 shows a similar pullback. A net 3% of euro area banks reported net tightening of lending standards to enterprises, driven by worries about credit quality and growth prospects.

• Housing loans: Standards eased modestly (net –7%) amid fierce competition among lenders, yet concerns over borrower resilience persist.
• Consumer credit: Net standards tightened by 3% as banks grew more cautious of household indebtedness and nonprime exposures.

Looking ahead to Q2 2025, euro area banks broadly expect further tightening across all categories, signaling that risk aversion will remain elevated.

Risk management and strategic responses

Banks are recalibrating portfolios in response to a complex web of credit, compliance, and strategic risks. Regulatory limits on asset concentrations, insider lending constraints, and enhanced consumer protection rules are shaping credit criteria.

In addition, lenders venturing into new markets—such as subprime auto lending or niche commercial segments—must deploy ongoing risk management challenges including advanced pricing models and robust portfolio monitoring systems.

Outlook for 2025 and conclusion

Despite the current retrenchment, many U.S. bankers anticipate standards may ease or remain unchanged during 2025 as economic visibility improves. The strongest easing is expected in multifamily commercial real estate, agency-eligible residential mortgages, and auto loans.

Most banks foresee a modest rebound in loan demand, particularly for C&I, CRE, and consumer auto financing. Credit card lending is expected to grow at a moderate pace as wage gains and job security support household spending.

In the euro area, persistent risk aversion suggests standards will stay tight into mid-2025. However, competitive pressures and improving macro indicators could gradually coax lenders to resume more accommodative stances.

As banks navigate this evolving landscape, balancing growth ambitions with capital preservation will be paramount. The tug-of-war between higher funding costs, regulatory demands, and borrower creditworthiness will continue to define the pace and breadth of credit availability.

Ultimately, the tightening of bank lending standards reflects a prudent response to elevated risks. Borrowers and investors alike must prepare for a period of selectively restricted credit, while policymakers and financial institutions work to foster stability and sustainable growth.