Bank Regulation

US Banks Tighten Business Loan Underwriting

As business loan performance drops off, U.S. banks are anticipated to rein in criteria this year, a Federal Reserve (Fed) survey showed on Monday (Feb. 3).

The Fed’s quarterly survey of senior loan officers from 74 domestic banks and 22 U.S. branches and agencies of foreign banks indicated that most are forecasting tougher standards for all types of lending due to an increased expectation of default as risk tolerance drops along with the value of assurances. 

“Banks reported expecting to tighten standards for most categories of business loans, credit card loans, and auto loans, but to leave standards unchanged for closed-end mortgage loans,” the survey said.

Loan performance is expected “to deteriorate somewhat” for all categories except for closed-end residential mortgage loans. 

Commercial, industrial and construction loans will likely have stricter requirements, as defaults are expected to rise. Demand is expected to stay steady.

“Banks reportedly tightened their lending standards on credit card and auto loans, while demand remained unchanged for credit cards and weakened for auto loans,” the Fed said in its quarterly survey.

A little more than a third of lenders anticipated an increase in defaults among subprime credit card borrowers. A little more than a quarter of bankers are expecting more subprime car loan delinquencies. 

Almost a fifth of financial institutions are anticipating tougher standards for credit cards, and nearly 10 percent of lenders surveyed indicated stricter auto loan criteria.

“It could be that we’re getting a bit longer in the cycle and the labor market’s maturing,” Kathy Bostjancic, chief U.S. financial economist at Oxford Economics, told the Wall Street Journal (WSJ). “Personal income growth is starting to gradually slow, that could be forcing some consumers to overextend a bit.”

She added that is nothing in the survey data that hints at an upcoming recession. “We’re far, far away from the conditions that existed ahead of the Great Recession,” she said.

The Federal Reserve unveiled a proposal last week that calls for revamping the Volcker Rule, which was created with the 2010 Dodd Frank bill. Its purpose was to prevent banks from making risky bets with customer deposits and investing in or sponsoring hedge funds. Proposed changes would loosen those regulations.

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