By Steven K. Beckner

(MNI) – There are signs of a thaw in the credit crunch, but the
availability and cost of credit remains very uneven, according to
results of a Federal Reserve survey released Monday.

The Fed’s April survey of senior loan officers at 79 banks shows a
small net fraction of banks eased lending conditions for large and
medium-sized business borrowers in the first quarter. And that was the
first time since 2006 that banks have eased business loan standards and
terms for two straight quarters.

However, the Fed said loan standards “remain quite stringent.”

What’s more, there was a dichotomy. Most of the banks that eased
lending conditions were large ones, and the beneficiaries were primarily
larger companies. For small firms, the survey found that banks continued
to tighten loan terms, such as the spread of loan rates above banks’
cost of funds.

As for households, large banks made mortgages, home equity credit
lines and consumer loans easier to get, but other banks tightened
lending standards. And credit card loan standards were generally
tightened further.

Thus, while there was an easing of lending conditions for some
categories of loans, the Fed survey overall showed a further net
tightening of loan terms and no change in lending standards.

Meanwhile, the Fed said credit demand weakened for all types of
loans, at least at domestic banks.

The Fed had previously reported that bank credit fell at a
seasonally adjusted annual rate of 5.1% in March. Total loans and leases
fell at a 6.3% rate, including declines of 17.9% for commercial and
industrial (C&I) loans; 7.0% for real estate loans, and 6.2% for
consumer loans.

The April survey of senior loan officers at 56 domestic banks and
23 foreign bank affiliates “indicated that most banks kept their
lending standards unchanged in the first quarter, but that moderate net
fractions of banks further tightened many terms on loans to businesses
and households.”

“For almost all loan categories for which the survey indicated a
further net tightening of credit standards, the fraction of banks that
reported having done so edged down and in a few categories banks eased
standards, on net,” the Fed’s summary of the survey findings said.

But those general findings don’t reflect the widely differential
behavior among banks and borrowers based on size.

“Most of the banks that reported having eased some lending policies
in the April survey were large banks,” the Fed said. “A number of large
domestic banks eased standards and some terms on commercial and
industrial (C&I) loans to large and middle-market firms. Branches and
agencies of foreign banks also reported easing standards and terms on
C&I loans, on net.”

“However, standards on C&I loans to small firms were roughly
unchanged, and terms on such loans were tightened further over the past
three months,” the Fed report continued.

“Turning to lending to households, large bank respondents eased
standards, on balance, for both prime residential mortgages and home
equity lines of credit, while other banks tightened standards for both
categories of lending,” the Fed said. “On net, large domestic banks
accounted for an easing of standards on non-credit-card consumer loans.”

“In contrast, modest net fractions of large and other domestic
banks continued to tighten standards and terms on credit card loans over
the past three months,” it added.

For C&I loans, the survey found that “on balance, a small net
fraction of banks reported easing their lending standards on C&I loans
to large and medium-sized firms,” as had the Fed’s January survey.

“While the net fraction of banks that eased standards on these
loans in the April survey increased only slightly, the latest survey
marked the first time since 2006 that banks reportedly eased standards
in two consecutive quarters,” the Fed said. “However, standards likely
remain quite stringent following the prolonged and widespread tightening
that took place over the past few years.”

But the easing was anything but uniform.

“Among domestic institutions, large banks were responsible for the
reported easing of standards to larger C&I borrowers,” the Fed said.
“None of the smaller banks, which compose roughly half of the respondent
panel, indicated that they had eased their standards on C&I loans to
large firms over the past three months.”

The Fed said a small net fraction of foreign banks affiliates eased
standards on C&I loans.

The Fed said “large domestic banks also eased some terms on C&I
loans for large and middle-market firms, on net, as did the foreign
branches and agencies. On balance, the large domestic institutions
mostly trimmed their pricing terms, including the cost of credit lines
and the spreads of loan rates over their costs of funds, while the
branches and agencies eased each of the seven surveyed C&I lending
terms, on net.”

But when asked about standards on C&I loans to smaller firms,
“almost all domestic banks, regardless of size, reported little change,”
the Fed said. Worse, “net fractions of domestic institutions reported
tightening terms on C&I loans extended to smaller firms.”

“This reported tightening of terms was more prevalent at smaller
banks,” it said, adding, “Notably, the net fraction of banks that had
increased premiums on loans to riskier borrowers remained fairly
elevated in the April survey.”

Banks that reported easing lending conditions cited competitive
pressures, the economic outlook, and tolerance for risk in the C&I loan
market.

“In particular, domestic banks that eased their C&I lending
standards pointed to increased competition from other banks or nonbank
sources of credit as an important factor in their decision,” the Fed
said. “Also, about two-thirds of such banks cited a more favorable or
less uncertain economic outlook.”

“Only a few banks reported having eased lending policies in
response to an increased tolerance for risk,” the report said.

Banks that tightened standards or terms on C&I loans “generally
indicated that they viewed the economic outlook as less favorable or
more uncertain and also reported further reductions in their tolerance
for risk.”

Demand from both small and large firms “weakened further,”
according to “small net fractions of banks,” the Fed said.

In response to a special question, “sizable fractions of both
domestic and foreign respondents reported having increased their use of
CRE loan extensions over the previous six months,” the Fed said.

Regarding lending to households, the Fed said “most banks reported
essentially no change in their standards on prime and nontraditional
mortgages over the past three months.”

Compared with the January survey, “a more sizable fraction of banks
indicated that demand for prime mortgages weakened over the past three
months and a fairly large net fraction of banks also reported that
demand for home equity loans weakened over the survey period.”

“On balance, domestic banks reported tightening their lending
standards and terms for credit cards, but their lending stance toward
other consumer loans eased,” the Fed said. “A small net fraction of
banks reported having tightened standards for credit cards, and moderate
fractions reported having reduced credit limits and increased spreads of
interest rates charged on outstanding credit card balances.”

“The further tightening of standards and terms on credit card
loans, however, did not carry over into other consumer loans, as small
net fractions of banks reported having eased standards and reduced
spreads for such loans,” the Fed continued. “Moreover, the net fraction
of banks that reported an increased willingness to make consumer
installment loans increased again.”

Once again, banks reported “weaker demand for consumer loans of all
types.”

** Market News International **

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