Banks make it harder to get a loan. Why this is bad news.
An uncertain economic outlook is forcing banks to tighten lending standards, according to a Federal Reserve survey.
While the second quarter saw the banks increase their reserves to protect against loan losses, they are also more careful about the money that comes out. The heightened surveillance affects both corporate and household loans, as banks fear that potential borrowers, hampered by an economy that is still largely at a standstill, will be unable to pay their debts.
The Fed conducted surveys of 75 U.S. banks as well as 22 U.S. branches of foreign banks to get an idea of how they measure credit risk. The surveys were sent out at the end of June, with responses due on July 2, meaning the results generally match the behavior of banks at the end of the second quarter.
For commercial and industrial loans, banks have reported that their lending standards have been at the tightest end of their ranges since 2005. By contrast, just a year ago, banks were at the lowest end of their range. the softer end of these forks. Likewise, banks have indicated that they have also tightened their standards for consumer and housing loans. Stricter standards are coming as banks are also seeing a decrease in demand in many loan categories as customers are reluctant to take on debt and have seen a decrease in business activity as well.
Tightening credit standards could be a worrying sign for banks, Jefferies analysts said Monday.
“As standards tighten, credit losses historically tend to increase,” wrote Ken Usdin, general manager of Jefferies, in a memo. In addition to declining lending, banks have also increased their reliance on collateral requirements, loan covenants, premiums on subprime loans and other measures.
Banks have taken swift action to increase their loan loss reserves in the first and second quarters to prepare for a wave of defaults as businesses have been closed and employees have been made redundant. While banks have reported that reserve creation peaked in the last quarter, they are still navigating rough waters.
Banks have been more inclined to work with customers during this uncertain time by offering and extending forbearance periods for several categories of business and consumer loans, but these accommodations also lead to uncertainty. While some clients were still able to make payments, it is not yet clear which clients depended on recently expired additional unemployment benefits or other federal programs to do so.
“We are waiting [net charge offs] increase due to impacts of COVID-19, although timing / magnitude is unclear given forbearance / loan modifications and intervention through Fed / government programs, ”Usdin wrote , referring to commercial and industrial loans, adding that many banks said they expect losses to appear at the end of this year or early 2021.
The heightened uncertainty weighed on bank stocks. The
(KBE) is down around 35% this year, while the
is up 2% and the
Write to Carleton English at [email protected]