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Banks Loosen Lending Standards in Race to Loan Money

Banks sitting on piles of cash are quickly easing lending standards for both consumers and small businesses in the second quarter as competition to extend loans heats up, according to Financial Times (FT) and data from the U.S. Federal Reserve.

See also: Banks Soften First-Quarter Lending Standards

About 25 percent of banks have loosened lending standards, USB analysts indicated, basing their calculations in part on Fed data. When looking at data from 2000 through the present, the rate of loosening credit standards is at an all-time high.

“Banks, on balance, reported that their lending standards on C&I loans are currently at the easier end of the range of standards between 2005 and the present,” according to The Fed’s July Senior Loan Officer Opinion Survey on Bank Lending Practices.

See also: Untapped Business Credit + Banks’ Cash Pile Trigger Spending Hope

Standards eased for all loan categories, including mortgages, compared to the July 2020 survey. However, banks are “currently having relatively tighter levels of lending standards on net” when it comes to business and residential mortgages.

Recent revenue reports from banks showed that new customers have been scarce, adding to concerns in the bond and loan markets about credit standards. Default rates are forecasted to stay low, however, according to bankers, analysts, rating agencies and investors, according to the FT report.

See also: Fed Considers Proposal To Allow FinTechs Access To Payment System

UBS analyst Matthew Mish told FT that there is a “tug of war” between risky loans and repayment optimism.

“It’s not a positive thing to see signs of froth or riskier, lower quality issuance in the market. The counterargument is that if the Fed keeps rates low, it is likely to outweigh the build-up in excesses,” Mish told FT.

The trailing 12-month default rate for the lower-rated “speculative-grade” companies is forecasted to drop to 2.5 percent by June 2022, from close to 4 percent today, according to S&P Global Ratings. 

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