Easier Bank Lending and Higher Loan Demand: Fact or Fiction?

Banks are more willing to lend to consumers and businesses alike, or at least that is what they claim.  A study released today from the Federal Reserve outlined the bank lending environment from April in a manner which the public probably feels is a report full of more fiction than fact.  If it isn’t fiction, then many will feel it is a very stretched-truth.

The April 2011 Senior Loan Officer Opinion Survey on Bank Lending Practices discussed the supply and demand for loans to businesses and consumers over the prior 90-day period and the claim is that bank lending standards are easing ‘somewhat further.’  The problem is that the demand for commercial and industrial loans and for commercial mortgages increased, but the demand for residential mortgages continued to fall.  If you looked through the latest mortgage requirements, you would probably refute that lending standards are easing.

The survey showed that about 15% of banks eased standards on commercial and industrial loans to large and middle-market firms and to small firms in the first quarter.  That report showed that 20% of foreign banks eased standards. Surprisingly, none of the domestic or foreign banks tightened standards on commercial and industrial loans during this period.  About 55% of domestic respondents reported improvements in the overall credit quality of large and middle-market loan applicants, and about 35% of domestic respondents reported improvements.  Most domestic banks reported no change in their standards for approving commercial real estate loans.  About 35% of domestic banks reported having seen increased demand for commercial real estate loans, the highest since the mid-1990’s.

Residential real estate lending remains soft as standards on prime closed-end residential real estate loans and home equity lines of credit were about unchanged in the first quarter of 2011. As in the previous two surveys, about 10% of banks tightened standards on non-traditional mortgages but this primarily reflected changes at smaller banks as larger banks left those standards about unchanged. The report also noted, “Moderate net fractions of banks reported weakening demand for both prime and nontraditional closed-end loans as well as for home equity lines of credit. Demand for closed-end loans has now declined for three consecutive quarters.”

On consumer lending, banks reported that the willingness to make loans was the highest since the first half of 1994. Some data is as follows: 

• 20% of banks reported having eased standards for approving credit card applications, and this easing was concentrated at the large banks.
• Terms were little changed for credit card loans, on balance, over the preceding three months.
• Standards for loans to purchase new and used autos were eased by about 15% of banks on net. 
• About 25% of banks reported that demand for auto loans had strengthened.

Whether or not you believe that demand is rising or that standards are easing really depends upon whom you speak to.  The credit standards rose so much during and after the recession that any real improvements for borrowing by the public could be quite far off.  We have spoken with small businesses and high-score borrowers who have had significant difficulty at many institutions getting credit.  The paperwork is often referred to as a hurdle to being denied upfront, or a hurdle to get decent borrowing terms. 

Again, whether you believe that bank lending standards are easing or that loan demand is growing really just depends upon whom you are speaking to.  The stories vary greatly, as do the apparent responses from lender to lender.

Billionaire John Malone was just on CNBC Friday and he completely refuted this notion that banks wanted to lend as well.  He even said that perception is true if you are Jamie Dimon, but not if you are Joe Public.

This Federal Reserve summary was based on responses from 55 domestic banks and 22 U.S. branches and agencies of foreign banks and the FULL DATA IS HERE.  Chances are that if only 55 institutions were surveyed, there is no way that the regional nuances nor that the regional climates were fully reflected.

JON C. OGG