Banking

Banks continued to ease standards and terms on loans to businesses during the fourth quarter of 2010, according to the Senior Loan Officer Opinion Survey conducted in January 2011. Meanwhile, banks' lending policies for other loans were little changed from the previous quarter. The survey, conducted quarterly by the Federal Reserve Board of Governors, covers 57 domestic banks and 22 foreign banks operating in the United States.

Credit availability improves for businesses
Citing a more favorable or less uncertain economic outlook, banks reported easing standards and terms on commercial and industrial (C&I) loans in the fourth quarter. This easing was especially true of loans to companies with more than $50 million in annual sales. Other factors, including heightened competition from other banks and nonbank lenders, industry-specific improvements, and a higher tolerance for risk, caused banks to ease lending standards.

Overall demand for business loans increased in the fourth quarter, according to the survey. Large and midmarket firms in particular showed greater demand for C&I loans, while a smaller percentage of banks reported higher demand for commercial real estate loans.

"Small and mixed" changes for consumer credit
Banks reported "small and mixed" changes in their terms and standards on consumer loans. Similar to the previous two quarters, a small percentage of banks reported easing standards on consumer credit card and non–credit card loans.

About 95 percent of banks reported that standards on prime residential mortgage loans were unchanged. It was much the same for nontraditional residential mortgages—87 percent of banks reported little change in their standards, while roughly 13 percent reported tightening their standards.

On the demand side, a moderate percentage of banks saw less demand for residential mortgage loans of all types. "Reported demand for closed-end loans has now declined for two consecutive surveys after having increased during parts of 2009 and 2010," said the Fed.

Banks optimistic about lending quality
A special set of questions about the asset quality outlook in 2011 indicated that banks are more optimistic than they have been in previous years. This set of questions has been asked once a year for the past five years. Banks were optimistic that delinquencies and charge-off rates would improve in almost every major lending category. However, the outlook was best for business loans—between 70 percent and 80 percent of respondents said they expect the quality of C&I loans to improve this year.

February 25, 2011