Loans

Banks Tightened Real Estate, Credit Card Borrowing Standards In Q1

Standards on commercial real estate loans and credit card borrowing were tightened by U.S. banks during the first three months of the year, with banks aiming to prevent losses from loans exposed to Asian and European economies.

Reuters, citing the U.S. Federal Reserve’s quarterly survey of senior loan offices, found tighter standards, particularly for those firms exposed to Asia and Europe, two major trading partners with the U.S. that have economies that are showing signs of slower growth. “A moderate net fraction of banks reported that they expect the quality of loans to exposed firms to deteriorate,” the Fed said in its report according to Reuters. The report noted that even though the U.S. labor market is strong and the economic growth in the U.S. remains healthy, increased concerns about the economic outlook is prompting banks to take a more cautious stance. “A significant net share of banks reported weaker demand for construction and land development loans,” the Federal Reserve said in the report.

Banks didn’t change the standards for vehicle loans and for commercial and industrial lending. Some of the terms of commercial and industrial loans eased rather than tightened, noted the report.

Traditional banks aren’t the only ones worried about a slowdown in economic growth and the impact it can have on their businesses. Online lenders, many of which were born out of the Great Recession, are preparing for a slowdown and taking a look at their risk exposure in order to prepare.

In April Reuters interviewed a half a dozen online lenders in the U.S. including LendingClubKabbage, and Avant, and found companies are worried that a recession could hit the U.S. economy, bringing with it an increase in credit losses, the potential for the need for liquidity and higher funding costs. Traditional banks have lower costs and a higher number of deposits, making it cheaper to lend money.  These online lenders also underwrite loans differently, relying on less traditional data points to approve loans. Those underwriting methods haven’t been tested yet when the economy is in a slowdown.

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