Banks further eased standards and terms on some types of business and household loans in the past three months, a Federal Reserve survey showed, while many said it would take years for standards to return to long-term norms.
Banks were more willing to make consumer installment loans and eased standards on credit-card loans, the central bank said in its quarterly survey of senior loan officers through the middle of October. At the same time, demand for mortgages remained weak, while demand for business lending fell, after having been unchanged in the previous survey.
“For the most part banks are no longer contracting lending,” Paul Dales, U.S. economist for Capital Economics Ltd. In Toronto, said before the report. “There is unfortunately very little evidence that lending is about to take off substantially.”
At its Nov. 3 meeting, the Federal Open Market Committee decided to buy $600 billion of Treasuries through June, a pace of roughly $75 billion a month, to lower unemployment and ward off deflation. In an Oct. 15 speech in Boston, Fed Chairman Ben S. Bernanke said “banks are no longer tightening lending standards and terms and are reportedly becoming more proactive in seeking out creditworthy borrowers.”
For the second consecutive survey, banks eased standards on commercial and industrial loans. Banks that eased “cited a more favorable or less uncertain economic outlook and increased competition from other banks and nonbank lenders as important reasons for doing so,” the Fed said in its survey.
Since December 2008, loans to businesses have dropped to $1.22 trillion from $1.62 trillion, while commercial real-estate loans have declined to $1.51 trillion from $1.73 trillion, according to a separate statistical release from the Fed for the week ending Oct. 27.
More banks reported weaker than stronger demand for business loans. Most banks reported no change in their standards for commercial and real estate lending.
Bank of America Corp., the largest U.S. bank by assets, said last month that it would hire 1,000 employees in the next year to focus on lending to companies with sales of $3 million or less. Brian Moynihan, chief executive officer of the Charlotte, North Carolina-based bank, said last month in a speech in Boston that bankers will be hired in Baltimore, Dallas, Los Angeles and Washington beginning this year.
For consumers, slightly more banks reported tightening standards on prime residential mortgages. In the previous survey, banks had slightly eased terms on mortgages. The tightening in standards was largely accounted for by smaller banks, the survey said.
Sales of existing homes rose in September by the most on record as cheaper borrowing costs helped stabilize an industry beset by foreclosures and unemployment near a 26-year high.
Existing home sales climbed 10 percent to an annual pace of 4.53 million from 4.12 million in August. The average rate on a 30-year mortgage dropped to 4.24 percent last week from 5.09 percent in January, according to Freddie Mac. In October, the rate fell to a record 4.19 percent.
In an editorial last week in the Washington Post, Bernanke said a further round of asset purchases will ease financial conditions and “easier financial conditions will promote economic growth.”
“Lower mortgage rates will make housing more affordable and allow more homeowners to refinance,” he said. “Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending.”
The Standard & Poor’s 500 Index fell 0.3 percent to 1,222.68 at 2:13 p.m. in New York as a five-week rally left the index at the highest valuation since May and concerns over Irish debt curbed demand for riskier assets. The yield on the 10-year Treasury note rose to 2.56 percent from 2.53 percent late yesterday.
Banks in the survey said that all types of lending would not return to normal for years. “For all loan categories, substantial fractions of respondents thought that their bank’s lending standards would not return to their long-run norms until after 2012 or would remain tighter than longer-run averages for the foreseeable future,” the Fed said.
The survey of loan officers at 57 U.S. banks and 22 U.S. branches of foreign banks was conducted from Oct. 5 to Oct. 19, the Fed said. The report doesn’t identify respondents. The panel of domestic banks had about $7 trillion in assets, or about two- thirds of the total assets for all domestically chartered, federally insured commercial banks.
New York Fed Survey
A separate survey released today by the New York Fed showed weaker loan demand may result from consumers borrowing less against homes and closing credit card accounts. Consumer indebtedness totaled $11.6 trillion at the end of September, down $110 billion, or 0.9 percent, from the end of June, according to the New York Fed’s quarterly report on household debt and credit.
Borrowers are repairing their household balance sheets, the report showed, with 11.1 percent of outstanding debts in “some stage of delinquency” compared to 11.6 percent a year earlier, the New York Fed said.
“Americans are borrowing less and paying off more debt than in the recent past,” Donghoon Lee, a senior economist at the New York Fed, said in a statement. Only part of the reduction can be attributed to defaults and charge-offs, he said. “This change, which we continue to study carefully, can be a result of both tightening credit standards and voluntary changes in saving behavior.”
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