–Latest Qtly Survey Sees Modest Increase in Demand, Easier Standards

By Denny Gulino

WASHINGTON (MNI) – Forced by competition to ease lending standards
further, U.S. banks are still not seeing more than a modest increase in
demand, the Federal Reserve reported Monday.

The latest quarterly Senior Loan Officers Survey of 55 domestic
banks and 22 outlets for foreign banks found that banks continued on net
to ease their lending standards for business while seeing only “modest
fractions” of banks experiencing increases in demand.

The afternoon’s report on the opinions of loan officers added
little if anything to modify the prevailing overall picture of anemic
borrowing in the face of continuing economic uncertainty. There was no
reinforcement of any fears that excess bank reserves in the system are
being funneled into the economy.

In response to a special question, all responding banks reported
flat or reduced loan demand, citing unfavorable economic conditions.

Even what increase in demand for commercial and industrial loans
was observed was not necessarily the result of more borrowing, the
report said. “Most domestic banks that experienced a strengthening of
demand cited a shift to bank borrowing from other funding sources as an
important reason for the change,” the report said.

The report suggested that, despite some other signs to the
contrary, business and consumer borrowers are retaining their
post-crisis caution, mostly impervious to the borrowing opportunities of
a low-rate environment.

One sign to the contrary was the Fed’s latest monthly report on
consumer credit, through June, showing the biggest increase since June
2008. That was a 7.7% rise at an annual rate that included similar sized
jumps in both revolving and nonrevolving categories.

However, earlier Monday the New York Fed released its quarterly
analysis of Equifax data and also saw no pronounced surge in borrowing
among consumers. Instead that report concluded that credit continues to
“heal” even as balances on most loan types fell. A positive indicator
was they fell only by small amounts, the report said.

In a revealing sign of consumer caution in borrowing, the New York
Fed said that although a net 10 million new credit card accounts were
opened during the quarter, up to a new total of 389 million, and credit
limits increased for the second consecutive quarter, the balances on
outstanding cards remain 20% below their 2008 high.

The FOMC’s announcement last week that the short-term rates it
controls will stay near zero for another two years has raised new
questions about whether that alone will have any appreciable effect on
consumer or business lending.

For business, the Fed’s weekly Friday measure of commercial and
industrial loans, through the Aug. 3 week, shows only a regression in
such lending, down 1.73% in four weeks. Large-bank domestic bank credit
overall has likewise been receding, down 0.24% in four weeks after
seasonal adjustment.

Monday’s report on loan officers’ opinions was unequivocal in
seeing static real estate related activity. “Demand for prime
residential mortgages was reportedly little changed on net, while a
small net fraction of banks indicated a weakening of demand for
nontraditional residential mortgages,” the report said.

About three quarters of bank respondents expected no pickup in loan
originations the rest of this year. The survey followed up with a
special question as to why and, “All respondents to this question cited
reduced or unchanged demand from creditworthy borrowers and almost all
of these respondents also pointed to unfavorable or uncertain forces for
the broad economy and house prices,” the report said.

As to consumer borrowing through credit cards and for autos the
loan officer’s survey did find some pickup along the lines of the New
York Fed household credit report which saw 10 million new card accounts
in three months. But, the afternoon report said, ” While positive net
fractions of respondents reportedly experienced an increase in demand
for both credit card and auto loans over the past three months, the
pickup in demand was not widespread; moreover, demand for other consumer
loans was about unchanged.”

The report repeated that as in past surveys, any easing of
standards was triggered by increased competition for existing business,
not an increase in demand. “As in the past several surveys,” the report
said, “the most commonly cited reason for having eased standards or
terms on C&I loans was increased competition from other lenders.”

The afternoon Fed loan officers survey was conducted through July
26.

** Market News International Washington Bureau: 202-371-2121 **

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