Bank lending standards declined at a record pace in the second quarter as loose monetary policy and continued economic recovery intensified competition for loans.
Overall, 25% of banks loosened lending standards for both consumer and corporate loans to small companies in the second quarter, according to analysts at UBS, relying in part on data from the US Federal Reserve. This represents a record rate of easing in credit conditions, based on data from the turn of the millennium.
Federal Reserve System noted that bankers who responded to a senior loan officer’s July survey on lending practices reported that commercial and industrial loans “are currently at the lighter end of the standard range from 2005 to the present.”
Fierce competition between banks and other lenders for new loans has contributed to a sharp rise in global debt since the start of the pandemic.
When the coronavirus hit last year, companies first used emergency bank loans, which boosted credit growth. But the support measures from the government and the central bank sparked a wave of demand among investors for loans to companies, and also allowed consumers to use stimulus money to pay off loans.
The result was decline in consumer loans such as credit cards and the shift in corporate lending away from banks – who still profit from record collection fees for organizing debt deals – to public and private investors.
UBS data showing banks are easing their lending requirements for consumers and small businesses comes after a series of income statements revealed the struggle of banks to open a new business. It strengthened concern are already present in the bond and loan markets, declaring their commitment to lower credit standards.
However, bankers, analysts, rating agencies and investors expect default rates to remain low for now, with debt repayment prospects for even the most risky borrowers supported by supportive monetary policy.
According to Matthew Misha, an analyst at UBS, the tension between risky lending and optimism about payments has caused a tug of war. “There is nothing good about seeing signs of foam or a more risky and inferior release on the market. The opposite argument is that if the Fed keeps rates low it is likely to outweigh the buildup of excesses. ”
The level of interest rates is important to the ability of companies and consumers to take on large debts, while lower borrowing costs reduce the amount of money needed to service loans, which usually results in fewer defaults.
S&P Global Ratings expects the next 12-month default rate for companies with lower “speculative grade” ratings to fall to 2.5% by June 2022 from nearly 4% today, adding that the upgrade has outpaced the rating downgrade by about 2%. … three to one this year.
Misch said the nominal yields on US Treasuries, taking into account many lending rates, are highly correlated with default rates on riskier corporate debt, with the long-term decline in yields over recent decades corresponding to fewer companies refusing to pay their debts.
“Whether you like the Fed’s policy or not, people who are worried about the foam and risk may be worried for a while because the net effect of the Fed’s policy is to suppress default rates,” he added.