April 19, 2015

Loan demand keeps climbing

Loan demand has been rising all over the nation, according to figures provided in the Federal Reserve's March Beige Book. The Fed report revealed that most regions have been enjoying promising economic conditions, and banking activity stood out as a strong point in many cases. 

Uneven improvement
Some districts providing information for the report fared better than others, with Atlanta and New York displaying the strongest loan demand, according to American Banker. The Fed banks in Dallas and Richmond painted a different picture, indicating that loan demand was lukewarm. 

Certain districts - including Boston- ran into some challenging weather conditions, which could have undermined their economic activity, American Banker reported. In addition to reporting this negative development, many banks noted their worries that lending standards have suffered, citing greater competition for credit. The Richmond and Philadelphia Fed districts were two areas in particular that spoke to falling quality for lending. 

In spite of these concerns about declining standards, the creditworthiness of borrowers grew stronger in comparison to the prior report. This improvement spanned many different types of lending, including consumer loans, residential mortgages, credit cards and commercial and industrial loans. 

Stronger labor market
While many borrowers have been becoming increasingly fit to attain loans, this trend could continue as the labor market continues to strengthen and applicants benefit from stronger and more reliable incomes. The Fed report pointed to such improvements. 

"Payrolls remained stable or expanded across the Districts, and contacts noted employment gains in a broad range of sectors," the Beige Book stated. "Contacts in several Districts noted strong labor demand and challenges filling a variety of skilled positions." 

While the job market showed signs of improvement, wages tracked higher, at least in some sectors. While these increases were generally modest, some contacts said that employers were increasing this payment to attract the best talent for positions that are difficult to fill. 

If the labor market keeps improving and wages continue to climb, these developments should help fuel greater demands for loans. While borrowing interest is strong and seems to be growing, some banks are having a hard time benefiting from the positive trend because their loan origination capabilities are inadequate. If banks find themselves in this situation, they can use loan portfolio purchases and sales to meet their balance sheet needs for commercial, consumer and residential loans.