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Banks ease lending terms and demand for loans rise, Fed says

Banks eased lending terms in the first quarter as they forecast improvement in the U.S. economy and companies sought more loans, according to a Federal Reserve survey.

“The April survey indicated that, on net, bank lending standards and terms generally had eased somewhat further during the first quarter of this year,” the central bank said Monday in its quarterly survey of senior loan officers. The looser standards for business loans reflected more competition among banks and some banks “also pointed to a more favorable or less uncertain economic outlook,” the Fed said.

Federal Reserve Chairman Ben S. Bernanke, speaking last week in his first news conference after a Fed policy statement, said tight credit following a financial crisis is one factor behind the “relatively slow recovery.” The Federal Open Market Committee renewed its pledge to hold interest rates low for an “extended period” and complete a $600 billion bond-purchase program by the end of June.

“Clearly, we are seeing a turn in the cycle,” said Mark Vitner, senior economist for Wells Fargo Securities in Charlotte. “Commercial lending has picked up as businesses have repaired their balance sheets ahead of households and the public sector. We are seeing some improvement in the household sector as well.”

Fifty-five percent of domestic banks surveyed reported improvements in the credit quality of large and middle-sized loan applicants, the Fed said. About 35 percent reported improvements in the credit quality of small firms, according to the survey.

The survey of loan officers at 55 domestic banks and 22 U.S. branches and agencies of foreign banks was conducted from March 29 to April 12, the Fed said. The report doesn’t identify respondents.

Some categories of lending have shown signs of improvement in recent months. Commercial and industrial loans increased at an annual rate of 11.3 percent in March, the largest gain since October 2008, according to Fed data, and the fifth consecutive monthly increase.

Lending to businesses is still far from its peak. Commercial and industrial loans rose to $1.25 trillion as of April 13 after reaching a trough of $1.21 trillion in October. Commercial real estate loans have dropped to $1.46 trillion from $1.73 trillion in December 2008, according to a separate Fed report.

Banks reported demand for commercial loans from large and medium-sized companies increased over the past three months, while reports of increased demand by small businesses were “less widespread.” The survey also found demand for commercial real estate loans “increased, particularly at larger banks.”

Some banks also eased standards for consumer loans, though demand was mixed, according to the survey. Consumer interest in residential mortgages declined, while demand for auto loans strengthened last quarter and credit card loans were little changed.

“Regarding changes in standards and terms on loans to households, several large banks eased lending policies on credit card and auto loans, and the net fraction of banks that reported having become more willing to make consumer installment loans rose to its highest level since the first half of 1994,” the Fed said.

— Bloomberg News



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