Fed Sees Weakening Credit Standards As Returning Demand For Lending

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WASHINGTON. Banks cut lending standards on all types of loans in the second quarter as demand increased and the economic outlook improved, according to the latest survey of the Federal Reserve’s senior loan officer on bank lending practices.

Most banks reported that they started to implement stricter lending standards for borrowers at the end of March 2020 as the economic outlook has changed in light of news of the spread of COVID-19.

But lenders recently changed course, reporting higher risk tolerance amid increased competition from other banks and non-bank lenders, the Fed said in a report released Monday. The survey is conducted on a quarterly basis.

In particular, banks reported a softening of the standards and conditions for lending commercial and industrial loans to companies of all sizes. A “significant net share of banks” reported receiving more inquiries from potential clients for new lines of credit or an increase in existing lines of credit.

"A large net share of banks has lowered the minimum required credit rating for credit card loans, while moderate net shares of banks have lowered that for auto loans and other consumer loans, ”said a survey of senior loan officers at the Federal Reserve.

“A significant net share of banks has lowered the minimum required credit rating for credit card loans, and moderate net shares of banks have lowered that for auto loans and other consumer loans,” said a survey of senior loan officers at the Federal Reserve.

Bloomberg News

“Major bank stocks that reported higher demand cited increased customer needs for inventory financing, accounts receivable, investment in machinery and equipment, and mergers and acquisitions as important reasons for the increase in demand,” the Fed said in a statement.

Most of the firms also told the Fed that they had lowered lending standards for credit card loans, as well as increased credit card limits, reporting an increase in demand.

“In line with lighter lending standards, a significant net share of banks has lowered the minimum required credit rating for credit card loans, and moderate net shares of banks have reduced this for auto loans and other consumer loans,” the Fed said.

Although banks also reported weakening standards for real estate lending, the study found that lenders may no longer be hesitant to relax these standards when compared to other categories of loans.

A large number of banks also experienced higher demand for multi-unit loans and loans for construction and land development. However, a more modest share of banks reported softening standards for commercial real estate loans. Only 7% of firms reported that their lending standards have dropped slightly for construction and land development loans. Fifteen percent reported that their lending standards had dropped slightly for loans secured by multi-unit residential real estate, and 1% reported that their standards had “dropped significantly.”

Financial institutions generally simplified lending standards for most categories of residential mortgages and revolving home equity lines in the second quarter – with the exception of subprime and government-funded enterprise loans. A significant number of banks reported softening standards, in particular for large loans.

However, banks said lending standards for both CRE and residential loans were historically tighter than average and tighter compared to the Fed’s Senior Loan Officer survey of July 2019. averages and generally unchanged from 2019.





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