Banks Ease Lending Terms in First Quarter, Survey Says

Banks Ease Lending Terms in First Quarter, Survey Says

banker signing a documentLoans were a bit easier to come by in the first three months of the year, according to the Federal Reserve's senior loan officer survey. The quarterly survey, which covers 58 domestic banks and 23 foreign banks with U.S. operations, also reported stronger demand for loans.

While the majority of respondents reported little change to their lending standards for commercial and industrial (C&I) loans, a small fraction of foreign banks tightened their standards. Meanwhile, a moderate share of banks reported easing their terms on such loans, citing heightened competition from other banks and nonbank lenders as the primary reason for doing so.

On the demand side, the share of domestic banks reporting stronger demand for C&I loans outnumbered those citing weaker demand for the second consecutive quarter. Banks also reported an uptick in inquiries about new or increased credit lines. The reasons given for stronger demand were varied, including shifts in borrowing, increases in customers' funding needs, and mergers and acquisitions.

Foreign, domestic banks differ on CRE lending
The experiences of domestic and foreign banks diverged again in their commercial real estate (CRE) lending. A modest fraction of U.S. banks reported easing standards on CRE loans, while foreign banks made little change to their lending standards. Demand for such loans was stronger for domestic banks but had not changed for foreign banks.

Similar to the previous two surveys, respondents were asked special questions about their lending to firms with European exposures. Both domestic and foreign banks reported tightening their standards on lending to European banks, while a smaller share said they tightened loans to nonfinancial firms with significant exposure to Europe.  "However, in all cases, the net fractions that reported having tightened substantially were smaller than in the January survey,” the report said. A majority of the domestic banks that reported competing with European banks for business said they had encountered less competition from European banks and their affiliates or subsidiaries in the first quarter, up slightly from the previous survey.

Lending to households
Most banks reported little change to their standards on prime residential loans, while a modest share of banks said that standards on nontraditional mortgages had tightened. Demand for both categories strengthened for most banks, however.

In another set of special questions, respondents were asked to compare their willingness to originate 30-year fixed-rate mortgages that are eligible for handling by government-sponsored enterprises (GSE) today with their willingness to do so in 2006 for borrowers at different points along the credit risk spectrum. A large majority of banks were less likely than they were in 2006 to originate such loans to borrowers with a credit score of 620 and a 10 percent down payment. Banks cited several reasons for their reluctance to lend, including higher costs for and difficulty obtaining mortgage insurance and a higher risk of "putbacks" of delinquent mortgages by GSEs.

A "small to moderate" fraction of domestic banks reported easing standards on a range of consumer loan products, including credit cards and auto loans. A moderate share of banks said they had lowered the cost of credit for auto loans, but terms across the other consumer lending categories were little changed in the first quarter. Demand for consumer loans, especially auto loans, strengthened during the same period.

May 17, 2012