Fed Says Banks Eased Lending Standards in Second Quarter Amid Competition

Banks loosened credit standards on most types of loans in the second quarter, with commercial and industrial lenders citing “aggressive competition” as a reason for the easier terms, according to a Federal Reserve survey.

“Banks continued to ease lending standards and most terms on all major types of loans other than loans secured by real estate over the past three months,” the central bank said today in its quarterly survey of senior loan officers.

Fed Chairman Ben S. Bernanke and his policy-making colleagues pledged on Aug. 9 to hold the main interest rate at a record low near zero at least until mid-2013, saying economic growth is “considerably slower” than anticipated.

“We’re going to see credit standards stay about the same in the next few months given the increased volatility in financial markets and increased uncertainty about where the economy is heading,” said Mark Vitner, senior economist at Wells Fargo Securities in Charlotte, North Carolina.

Most banks expect the pace of mortgage lending to stay about the same through the rest of this year, according to the Fed survey. Lackluster demand from creditworthy borrowers and uncertainties about the outlook for house prices and the overall economy were the main reasons, according to the central bank.

Even with record monetary easing, Europe’s sovereign debt woes, weak economic growth and an unprecedented downgrade of the U.S. credit rating have triggered turmoil in financial markets and pushed down bank stocks. The Standard & Poor’s 500 Banks Index has fallen about 27 percent since its peak for the year on Feb. 15.

Shifts in Equities

U.S. equity swings last week were unprecedented, according to data compiled by Birinyi Associates Inc., Bloomberg and Howard Silverblatt, a senior index analyst at S&P. The S&P 500 Index fell or rose more than 4.4 percent on each of the first four days of last week, reversing direction in a back-and-forth pattern not seen at that magnitude in the history of the benchmark gauge for U.S. stocks.

The S&P 500 Index rose 1.8 percent to 1,200.49 at 3:16 p.m. in New York trading, while the S&P 500 Banks Index gained 3.3 percent to 116.33.

Bank of America, the nation’s biggest lender, slumped last week on investor speculation that the bank might have to sell shares or assets to bolster capital, possibly including parts of Merrill Lynch. Brian T. Moynihan, Bank of America’s chief executive officer, rejected such measures in an Aug. 10 conference call and said the bank will meet its capital targets. Both Bank of America’s and Citigroup Inc.’s stock dropped more than 10 percent that day.

Foreign Lenders

The Fed survey of loan officers at 55 domestic banks and 22 U.S. branches and agencies of foreign banks conducted from July 12 through July 26, the Fed said. The report doesn’t identify respondents.

Like the previous survey released in early May, the new survey found that banks continued to ease terms for business borrowers, including those seeking to take out commercial and industrial loans. More competition among lenders was the most commonly cited reason for the loosened standards, although “a more favorable or less uncertain economic outlook” also factored into the decisions, the Fed survey found.

Wells Fargo’s Vitner said lenders are “competing very fiercely for the limited number of creditworthy borrowers out there.” Commercial projects that are 70 percent to 80 percent leased, or that have high-quality tenants signed up, are especially attractive to lenders, he said.

“Those are the type of deals that are getting financed,” Vitner said.

‘Modest’ Increase

A “modest” increase in demand for commercial and industrial loans also was reported over the last three months, the Fed said.

Commercial and industrial loans totaled $1.28 trillion for the week ending Aug. 3, according to a separate Fed report. That was up from $1.27 trillion for the week ending July 27. Loans to consumers came to $1.09 trillion, little changed from the prior week.

On the consumer front, banks said standards on home mortgages were little changed for both prime and non-traditional loans during the second quarter.

In addition, about three-quarters of banks said they expected the pace of mortgage lending “to remain at about the same level through the rest of 2011,” the Fed said.

The banks cited “reduced or unchanged demand from creditworthy borrowers” as a factor. They also pointed to “unfavorable or uncertain forecasts for the broad economy and for house prices.”

Drag on Growth

The housing market has been a drag on economic growth as sliding home prices cut into consumer confidence and wealth.

Sales of existing homes, the largest portion of the housing market, totaled 4.77 million on an annualized basis in June, a 34 percent drop from their pre-recession peak in September 2005.

Central bankers and finance ministers from the Group of Seven nations last week pledged to “take all necessary measures to support financial stability and growth.”

The economy expanded at a 1.3 percent annual pace in the second quarter, less than forecast by economists, a July 29 government report showed. The economy almost stalled in the prior quarter, growing at a 0.4 percent pace, the weakest three- month period since the recovery began in June 2009.

U.S. household debt declined by 0.4 percent in the second quarter as mortgage and home equity line balances shrunk, according to a survey released today by the New York Fed.

Consumer indebtedness fell $50 billion from the end of March to $11.4 trillion on June 30, according to the quarterly report on household debt and credit released by the district bank. Households have cut debt by $1.08 trillion, or 8.6 percent, from its peak in the third quarter of 2008 as the financial crisis escalated.

To contact the reporter on this story: Jeannine Aversa in Washington at javersa@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.