Garnet Capital Advisors Blog

The January 2017 Senior Loan Officer Opinion Survey on Bank Lending Practices indicates that bank lending is becoming more restrictive in certain areas, including credit cards and auto loans. Consumer loans and commercial real estate experienced lower demand.

POST:

The January 2017 Senior Loan Officer Opinion Survey on Bank Lending Practices recently published by the Federal Reserve is more cautious on the state of the economy than the post-election stock market rally and political emphasis on easing regulation and creating jobs would indicate.

A recent Fed survey indicates some areas of tightening in bank lending.

According to the survey, banks have made their lending more restrictive in several areas, including credit cards and auto loans. Credit card lending was made more restrictive by 8.3% of banks, the highest level since the Great Recession year of 2009. Auto lending was made more restrictive by 11.7%.

The report also indicated that commercial real estate (CRE) had tightened. Overall, commercial and industrial (C&I) business was unchanged, although some of the U.S. banks had tightened their C&I standards. Those that did gave a nod to the uncertain economy as a reason.

On the demand side, consumer loans and CRE were experiencing less robust demand than previously.

The Wall Street Journal observed that the economics implied by the activity were significant because bank lending data tends to look forward and to move in tandem with the economy.

The more restrictive lending policies could mean some future weakness in the economy.

The spread between short- and long-term interest rates has been narrowing, potentially causing a drop in net interest margins. That could be one factor in banks moving toward stricter standards. However, the yield curve has steepened in recent weeks, which may cause a rise in lending.

Rising interest rates are also affecting lending.

What Factors Affect Lending Potential?
Despite the Federal Reserve's survey, core lending appears to be up at the big banks. According to the New York Times, J.P. Morgan's average core loans climbed 12% year over year, while both Wells Fargo and Bank of America registered 6% increases. Citigroup's core lending grew less, at 1%, but was still a positive increase.

The report was given as a counter to political claims that Dodd-Frank, banking regulation enacted in the wake of the housing crisis, had caused a drop in lending. The legislation required increased capital ratios and more liquidity. Its dampening effect on loans is given as a reason for its repeal.

However, the New York Times points out that higher dividends and stock buybacks have also diminished the capital available for lending, as has the current upward direction of interest rates.

Out of 18 large banks, 14 showed less common equity in the fourth quarter of last year, stemming from rising interest rates, increased dividends, and share buybacks. The total drop in common equity was nearly $18 billion.

Let a Seasoned Loan Adviser Help
In the current climate, it is prudent for banks to review their portfolio, sell loans that do not fit their investment criteria, and purchase high quality portfolios that meet their needs. Garnet Capital can help. Register for our online portfolio auction system to receive news from Garnet, access sale information, and participate in the bidding process.