US banks updates
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Bank lending standards eased at a record pace in the second quarter as loose monetary policy and the continuing economic recovery fuelled competition for loans.
A net 25 per cent of banks loosened lending standards in both consumer loans and corporate loans to small companies over the second quarter, according to analysts at UBS, drawing in part from US Federal Reserve data. It marks a record pace of easing in credit conditions based on data going back to the turn of the millennium.
The Fed noted that bankers responding to its senior loan officer survey on lending practices in July reported that commercial and industrial loans “are currently at the easier end of the range of standards between 2005 and the present”.
Furious competition between banks and other lenders to offer new loans has contributed to a sweeping rise in global indebtedness since the onset of the pandemic.
When coronavirus struck last year, companies initially drew down on emergency bank lending facilities, boosting loan growth. But government and central bank support measures triggered a wave of demand among investors to lend to companies, as well as allowing consumers to use stimulus money to pay back borrowing.
The result has been a decline in consumer loans such as credit cards and a shift in corporate lending away from banks — which have still profited from record fees for arranging debt deals — to public and private investors.
The UBS data showing banks loosening their requirements to lend to consumers and small businesses comes after a string of earnings reports revealed banks’ struggles to drum up new business. This has amplified concerns already present in bond and loan markets about a race to the bottom in credit standards.
The expectation among bankers, analysts, rating agencies and investors however is for default rates to remain low for now, with prospects for even the riskiest borrowers to repay debts buoyed by supportive monetary policy.
The tension between risky lending and optimism over repayments has created a “tug of war”, said Matthew Mish, an analyst at UBS. “It’s not a positive thing to see signs of froth or riskier, lower quality issuance in the market. The counter argument is that if the Fed keeps rates low, it is likely to outweigh the build-up in excesses.”
The level of interest rates is important for both companies’ and consumers’ ability to take on more debt, with lower borrowing costs reducing the amount of money needed to service loans, typically leading to lower defaults.
S&P Global Ratings anticipate the trailing 12-month default rate for the lower-rated “speculative-grade” companies to fall to just 2.5 per cent by June 2022, from close to 4 per cent today, adding that ratings upgrades have outpaced downgrades by roughly three to one so far this year.
Mish said nominal US Treasury yields, which factor in to many lending rates, are broadly correlated with default rates on riskier corporate debt, with the long-run decline in yields over recent decades corresponding to fewer companies reneging on their debts.
“Whether you like the Fed’s policy or not, the people worried about froth and risk taking may be worried for a while because the net effect of Fed policy is to suppress default rates,” he added.