A sizable proportion of U.S. banks revealed they had tightened lending standards for commercial and industrial loans to businesses of all sizes in the previous quarter, according to a Fed survey of bank lending practices released on Monday.

Bank Lending Adjusting to A New Post-Pandemic Reality: The Federal Reserve Senior Loan Officer Opinion Survey (SLOOS) for April, a key gauge for assessing the evolution of demand for loans to businesses and households, revealed that the tightening in banking loans to businesses reflected a less favorable or more uncertain economic outlook, reduced tolerance for risk, worsening of industry-specific problems, and deterioration in their current or expected liquidity position.

On the household front, banks reported a tightening of lending criteria for all types of residential real estate (RRE) loans.

Credit Crunch On The Horizon: Regarding the banks' outlook for lending standards over the rest of 2023, a further tightening in credit standards is expected across all loan categories. Banks cited the deterioration in the credit quality of their loan portfolios and in customers' collateral values, concerns about bank funding costs, and deposit outflows as key reasons for a worsening lending outlook.

Joseph Brusuelas, chief economist for RSM US LLP, highlighted that "roughly 56% of loan officers noted a decline in demand for loans by large and mid-market firms, while 53% reported a decline in credit demand by small firms." The rising cost of capital, as shown by the Fed's lending survey, will have an adverse impact on investments, hiring, and growth, according to Brusuelas.

"Recent turmoil in the banking sector and a looming debt ceiling crisis are the primary reasons why we lifted our estimation of the probability of a recession to 75% over the next twelve months," the economist added.

Bad News Ahead For Stocks? Minor swings were seen in the stock markets following the release of the April SLOOS, with the SPDR S&P 500 ETF Trust (SPY  ) dipping marginally before quickly regaining its losses.

The U.S. dollar, on the other hand, reacted positively to the survey, with the U.S. dollar (DXY) index, which is tracked by the Invesco DB USD Index Bullish Fund ETF (UUP  ), climbing 0.2%.