Banks are Loosening Lending Standards

According to the ABI on May 29, 2018,

Faced with tepid loan growth and heated competition for clients, banks are sweetening their deals on loans to businesses, a development that is concerning regulators, the Wall Street Journal reported. Lenders are giving corporate borrowers lower rates and looser terms, even if they operate in industries that are under strain, according to regulators and a Wall Street Journalanalysis of lending data. The development is a boon to companies looking to borrow cheaply while the economy is doing well. But regulators are raising red flags, particularly since rising interest rates may make it harder for businesses to pay off the loans. The Office of the Comptroller of the Currency, or OCC, in a report last week identified the easing of commercial loan standards as a top risk in the industry. While the rate of bad business loans remains very low and most banks still have a moderate risk appetite, the regulator said that over the past year it privately issued more warnings ordering financial institutions to modify their business-lending practices. Banks became more conservative lenders following the financial crisis, tightening standards in some sectors to focus on loans that are, for instance, secured by a business’s inventory or energy reserves, and typically would have to be paid back first in the event of a bankruptcy. Around 2013, terms started loosening a bit, the OCC said. Then, in late 2016, banks’ commercial-loan growth slowed sharply for reasons that still aren’t clear. The annual growth rate was 1.3 percent at the end of 2017, down from 12 percent three years earlier. Eager for loan growth to fuel profits, banks since then have been loosening standards further to attract business, the OCC said. They are extending interest-only periods, allowing borrowers to draw down bigger portions of the value of collateral and relaxing covenants meant to protect from losses, the agency said. Many large banks are also lowering rates over their cost of funds, according to the Federal Reserve.

Query whether the current lending climate will lead to substantial future defaults, much like the climate during 2008 and 2009.

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