Easier Loan Standards Fail to Boost Demand, Fed Survey Shows

Housing Sales
A for sale sign stands outside a home for sale in Media, Pennsylvania, U.S. Photographer: Mike Mergen/Bloomberg

Demand for loans at the majority of lenders in the U.S. failed to rise last quarter even as banks eased standards for the first time since the credit crisis began, a Federal Reserve survey showed.

Banks eased standards and most terms on loans to businesses of all sizes, according to the Fed’s quarterly survey of senior loan officers, released yesterday in Washington. The Fed described the change as “a modest unwinding of the widespread tightening that occurred over the past few years.” Credit standards for small firms were loosened for the first time since late 2006.

The survey highlights the challenges faced by central bankers as they seek to preserve an economic recovery threatened by unemployment close to a 26-year high. Record-low interest rates and $2.05 trillion in securities holdings, which the Fed last week said it would keep from shrinking, have yet to unlock demand for corporate and consumer loans.

“The takeaway is it’s mainly a demand problem, and not so much about credit supply,” said Harm Bandholz, chief U.S. economist at UniCredit Global Research in New York. “The private sector is not responding to low interest rates and easing credit conditions.”

Asked how banks had changed their credit standards for loans to companies with annual sales of $50 million or more, seven said they had “eased somewhat,” two had “tightened somewhat” and 48 had terms that “remained basically unchanged.”

For consumers, credit standards on prime residential mortgages loosened. Five of 29 large banks in the survey eased their standards. In all, 21 banks reported demand for mortgages had increased, and 16 said demand decreased.

Large Banks

“While the survey results suggest that lending conditions are beginning to ease, the improvement to date has been concentrated at large domestic banks,” the Fed’s survey said. “Most banks reported that demand for business and consumer loans was about unchanged.”

Since December 2008, loans to businesses have dropped to $1.24 trillion from $1.62 trillion, while commercial real-estate loans have declined to $1.55 trillion from $1.73 trillion, according to a separate statistical release from the Fed for the week ending Aug. 4.

One-fifth of large domestic banks reported easing standards for loans to small businesses. Banks cited increasing competition as a reason for easing standards on business loans.

‘More Comfortable’

“We’re getting more comfortable with making loans and standards are easing, which is a good thing, but at the end of the day demand is the whole story,” said Dan Greenhaus, chief economic strategist at Miller Tabak & Co. in New York. “The more pressing issue is still, how do we get businesses and people to borrow and invest.”

The Standard and Poor’s 500 Financials Index fell 0.2 percent to 188.69 at the 4 p.m. close of trading yesterday in New York. The broader S&P 500 Index was little changed at 1,079.38. The yield on 10-year Treasuries fell 10 basis points, or 0.1 percent, to 2.577 percent, the lowest in 16 months.

Banks in the survey reported easing business loans in response to “more aggressive competition” from other banks and the bond markets.

Google Inc., owner of the most popular Internet search engine, and Germany’s Merck KGaA are leading a revival in commercial paper as nonfinancial companies grab the biggest share of the $1.1 trillion U.S. market from banks since 2002 amid lower borrowing costs.

Industrial companies have $151 billion of debt typically due in 270 days or less, up 47 percent this year, seasonally adjusted Federal Reserve data show.

Commercial Paper

Companies including Mountain View, California-based Google and Darmstadt, Germany-based Merck and more than a dozen other firms have said they boosted commercial-paper used to refinance more expensive debt, fund acquisitions and meet day-to-day expenses.

“Like financial conditions generally, the state of the U.S. banking system has also improved significantly since the worst of the crisis,” Fed Chairman Ben S. Bernanke said in an Aug. 2 speech. “Loss rates on most types of loans seem to be peaking, and, in the aggregate, bank capital ratios have risen to new highs.”

President Barack Obama last month signed the toughest set of U.S. financial market rules in seven decades. The bill creates a consumer bureau at the Fed, a council of regulators to monitor firms for systemic risk to the economy, and a mechanism for liquidating large financial firms whose collapse could threaten economic stability.

New Rules

Uncertainty about the implementation of new regulatory rules may be inhibiting economic growth, Dallas Fed President Richard Fisher said in a speech last month. Businesses “are increasingly distressed by the lack of consistent direction coming from Washington,” he said. “They are confused and dispirited by random refereeing.”

Housing sales have slumped since the expiration of a government tax credit this summer. Purchases of existing homes declined to a 5.37 million annual rate in June from 5.79 million in April, according to the National Association of Realtors.

The drop in home sales occurred even as the average 30-year fixed-rate mortgage dropped to 4.44 percent last week, the lowest level on record, according to an index from home-finance provider Freddie Mac.

One bank in the Fed survey said it was less willing to make consumer installment loans, while 13 said they were more willing and 39 said their willingness was about unchanged. Three banks said they had eased standards for approving credit card applications; none said they had tightened.

Credit-Card Debt

In June, credit-card debt dropped to the lowest level since October 2005, according to a separate Fed report, an indication that consumer purchases, which account for about 70 percent of the economy, will be restrained as Americans rebuild savings.

Retailers such as Aeropostale Inc., American Eagle Outfitters Inc. and TJX Cos. reported July sales that missed analysts’ estimates as consumers cut spending ahead of the back-to-school season.

Sales at Aeropostale, the U.S. teen clothing retailer with more than 900 outlets, rose 1 percent at stores open at least a year, short of the 7.4 percent average of analysts’ estimates compiled by Retail Metrics Inc. Sales at American Eagle were unchanged and those at TJX rose 2 percent.

The survey of loan officers at 57 U.S. banks and 23 U.S. branches of foreign banks was conducted from July 13 to July 27, the Fed said. The report doesn’t identify respondents. The panel of domestic banks had about $7 trillion in assets, about two-thirds of the total assets for all domestically chartered, federally insured commercial banks.

At Zero

As of Aug. 11, banks have $1.03 trillion in excess reserves. The Fed has kept its benchmark interest rate at zero to 0.25 percent since December 2008.

Not all categories of lending showed improvement. Most banks reported no change in standards for commercial real estate lending, with a small proportion reporting a tightening.

Commercial real estate prices have risen 8.6 percent from their trough in October 2009, according to an index from Moody’s. Prices remain 39 percent below their 2007 peak.

-- With assistance from Allison Abell Schwartz in New York and Bryan Keogh in London. Editors: James Tyson, Christopher Wellisz

Scott Lanman in Washington at slanman@bloomberg.net;

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