Fed Survey Reports Easier Lending Policies in Late 2013

Banks eased their lending policies and saw stronger demands for most types of business and consumer loans in the fourth quarter of 2013, according to the Federal Reserve's January Senior Loan Officer Opinion Survey.

The survey included responses from 75 domestic banks and 21 foreign banks with U.S. operations. Respondents answered questions about changes in the standards and terms on their loans to businesses and households and demand for such loans. The latest survey also included special questions about banks' reaction to supervisory guidance on leveraged lending and the outlook for loan performance.

Banks faced strong competition for business loans
A modest net share of banks reported easing their standards on commercial and industrial (C&I) loans to large and middle-market firms, while standards on loans to small firms were mostly unchanged. Banks also reported easing nearly all terms on C&I loan to firms of all sizes.

Among the U.S. banks that reported easing their lending policies in the fourth quarter, most cited aggressive competition as an important reason for doing so. Other factors included an improved or less uncertain economic outlook and increased risk tolerance.

The survey also polled banks about their reaction to March 2013 supervisory guidance on leveraged lending. A number of large U.S. and foreign banks reported tightening standards on such loans. The same banks also reported curtailing or significantly altering some leveraged loans, although many of them believed that other sources of funding were available.

Banks offer mixed response for consumer lending
The survey responses paint a mixed picture of consumer lending in the fourth quarter. A modest share of large banks reported easing standards on prime residential mortgage loans. However, a similar share reported tightening standards on those loans. Banks also reported weaker demand for prime and nontraditional mortgages, on balance.

A modest share of banks said they were more willing to make consumer installment loans than they were in the previous quarter. Banks reported easing standards for credit cards, auto loans, and other consumer loans. However, the terms on such loans were little changed, with the exception of credit card limits and rate spreads on auto loans. On net, a modest share of banks reported increased demand for all types of consumer loans.

Banks expect improved loan performance in 2014
Looking ahead to 2014, domestic and foreign banks generally expected loan delinquency and charge-off rates to decline this year, assuming the economic performance doesn't deviate much from consensus forecasts.

On net, a modest-to-large share of domestic banks expected improved performance on most loans to households, with the exception of subprime auto loans.

The outlook for business loans was also positive, with about 20 to 40 percent of respondents, on net, expecting a decline in charge-off and delinquency rates in 2014. "These responses indicated that expectations of improvement in the quality of C&I loans are somewhat less widespread than in the 2013 survey, which is largely consistent with the already low delinquency and charge-off rates on such loans by historical standards," the report said.

February 19, 2014