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The covid-19 pandemic continues to create economic uncertainty in the financial industry, causing banks across the nation to continue tightening their loan standards, according to a survey by the Federal Reserve.

And, as lending standards become stricter, demand for commercial and industrial loans as well as commercial real estate loans has weakened, the Fed's senior loan officer survey found.

In the third quarter ended Sept. 30, lenders reinforced stricter standards for residential real estate and consumer loans but reported stronger demand for credit card loans, auto loans and most categories of residential real estate loans.

Most bankers said that lending standards have become stricter and "cited a less favorable or more uncertain economic outlook, worsening of industry-specific problems and reduced tolerance for risk," the Fed reported.

The agency surveyed 72 senior lending officers at banks across the United States related to their third-quarter loan activity.

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Arkansas' lending environment mimics the national trend as state bankers remain cautious during the pandemic. "Banks and businesses alike are still wary of the long-term unknown impacts from the pandemic," said Jon Harrell, chairman of the Arkansas Bankers Association.

The survey was conducted before the Nov. 3 presidential election. Results likely reflected the uncertainty over the make-up of the White House as well as Congress' continued haggling over more economic stimulus, said Harrell, who is the chairman of Generations Bank in Rogers.

"The inability of the federal government to come together on additional stimulus funds for at-risk industries most likely contributed [to tighter lending] as did the uncertainty of the yet to be determined election cycle," he said.

The survey found that bankers tightened lending standards on all commercial and industrial loans for businesses of all sizes. At the same time, the financial institutions reported that demand for those loans weakened in the quarter.

Likewise, banks said demand dropped for loans in all key commercial real estate categories – construction and land development, nonfarm residential and multifamily loans – as lending standards became stricter.

Lenders also made it a little more difficult for consumers to borrow, tightening standards for loans to homeowners, auto loans, credit card loans and other consumer loans. Yet consumers continued to seek financial support, the survey found.

"Banks reported stronger demand for credit card loans, auto loans and most categories of RRE loans," the survey said. RRE refers to residential real estate loans, including mortgages and refinancing.

Harrell said it is no surprise that consumer demand remains strong despite the pandemic. "The lower interest rate environment obviously increased demand for consumer loans, which include auto and residential real estate loans," he said.

The uptick in consumer interest in credit card loans could reflect consumer fears that the pandemic will continue to disrupt the economy.

"The increase in credit card loans is more perplexing due to the influx of stimulus checks in the second quarter and the decrease in consumer spending," Harrell said. "Perhaps consumers are applying for credit cards preparing for income interruptions due to the ongoing pandemic."

Overall, responses from the senior loan officers highlight the anxiety related to covid-19, Harrell said. "Bottom line, I think uncertainty is the driver behind all of the third-quarter data," he said.

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