Tightening Lending Standards & Increasing Loan Loss Reserves?

By Bill Dolan, CMB

Though financial institutions across the board have been urged to get money to those hit hard by COVID-19, banks and credit unions within their commercial real estate, auto and credit card portfolios are getting tighter in lending out money compared to previous quarters.

Except for residential lending, demand for both commercial and industrial loans along with other forms of consumer debt has waned considerably. Presently, we are facing uncharted waters with a more uncertain economic outlook, creating a decreased tolerance for risk.

In a recent survey, loan officers indicated that when it came to consumer lending, both banks and credit unions were lowering their credit limits and insisting on higher credit scores.

With these changes occurring, prudent financial institutions have begun increasing the necessary provisions for loan losses to your reserves, as eventually, we will realize these losses as we find our “new normal.” The real unknown is just how long will this last and whether borrowers will be able to get their jobs back.