By Steven K. Beckner

(MNI) – U.S. banks have been easing loan terms in the face of
stronger loan demand and diminished competition from European
banks, according to the Federal Reserve’s quarterly senior loan officers
survey released Monday.

While loan standards have changed little, banks have been easing
pricing terms, particularly on business loans. The January survey
also finds some easing of consumer loan conditions, along with
increased demand.

Credit in the residential real estate market remains tight,
however, the Fed report suggests.

In response to a special question, the survey also finds that U.S.
banks are taking steps to protect themselves from a spillover of the
European debt crisis.

To reduce their exposure to European banks, the Fed says that,
increasingly, “large fractions” of banks have been tightening standards
for loans to European banks and their affiliates, making it harder for
European financial firms to obtain dollar credit.

What’s more, the Fed survey of 56 domestic banks and 23 foreign
bank branches finds that U.S. banks are getting more business as they
face less competition from European banks, which hold large amounts of
distressed Greek and other government bonds.

The Fed says “domestic banks reported that their lending standards
had changed little and that they had experienced somewhat stronger loan
demand, on net, over the past three months.”

Foreign banks, meanwhile, “reported a net tightening of their
lending standards while loan demand was about unchanged.”

Reflecting recent upsurges in commercial and industrial loans, the
greatest amount of ferment seems to come in that segment of the credit
market.

“Regarding business loans, domestic banks reported, on balance,
little change in standards … (for C&I) loans but a continued easing of
pricing terms on such loans during the fourth quarter,” the Fed said in
summarizing the findings.

“Domestic banks reportedly experienced stronger demand for C&I
loans from firms of all sizes on net,” it continued. “The net fraction
of banks reporting increased demand from small firms rose to its highest
level since 2005.”

But “foreign respondents reported having tightened both standards
and terms on C&I loans, on net, and they indicated that loan demand had
been about unchanged over the past three months.”

The Fed said “domestic banks continued to report little change in
their standards for CRE (commercial real estate) loans, but modest net
fractions had eased some loan terms over the past year.” It said
“moderate net fractions of domestic banks reported that demand for CRE
loans had strengthened in the fourth quarter.”

As for household credit, the survey found that “lending standards
and demand for loans to purchase residential real estate were reportedly
little changed over the fourth quarter on net.”

“Standards on home equity lines of credit (HELOCs) were about
unchanged, while demand for such loans weakened on balance,” it said.

Outside of real estate, though, the Fed said “moderate net
fractions of banks reported that they had eased standards on all types
of consumer loans over the past three months, and some banks also eased
terms on auto loans.”

“Demand for credit card and auto loans reportedly had increased
somewhat, while demand for other types of consumer loans was about
unchanged,” the Fed said.

The survey findings on loan demand and bank willingness to lend
tend to confirm what Fed statistics on bank assets have been showing for
some time now.

Total loans and leases grew last year, by a meager 1.7%, after
declining in 2009 and 2010. Overall lending picked up toward the end of
2011, growing by an annualized 4.2% in the third quarter and by 5.3% in
the fourth quarter.

Most of the strength came in commercial and industrial loans, which
rose by 9.7% for the year and 10.7% in the fourth quarter.

Real estate loans, not surprisingly, continued to decline, falling
4% last year, though the rate of decline slowed toward the end of the
year, edging down just 0.4% in the fourth quarter. Residential real
estate lending was stronger than commercial real estate loans.

Consumer loans fell for all of 2011, by 0.7%, after plunging 6.9%
in 2010. But consumer lending picked up late in the year and grew by
1.6% in the fourth quarter.

The Fed survey found that banks have become more optimistic on loan
quality. “Overall, between 15 and 60 percent of domestic banks, on net,
expected improvements in delinquency and chargeoff rates during 2012 in
the major loan categories included in the survey.”

“Expectations for improvement in 2012 were less widespread than
they were a year ago, but last year’s expectations were the highest in
the history of the question,” it said.

** Market News International **

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