UPDATE 2-Fed sees easing in bank lending standards, loan demand up

Mon May 6, 2013 6:01pm EDT

* Fed loan officer survey finds lending conditions eased

* Fed: 19 pct of banks relaxed terms for larger borrowers

* Picture for household credit more mixed, demand up

By Alister Bull

WASHINGTON, May 6 (Reuters) - Banks eased lending standards to U.S. businesses over the last three months as competition intensified and loan demand advanced, the Federal Reserve said on Monday, improving odds that ultra-low interest rates will be passed on to borrowers.

The findings of the U.S. central bank's quarterly senior loan officers survey, which provides a detailed dispatch from the front lines of the U.S. economy, were broadly in line with other indicators showing steady, but still gradual growth.

"The survey results generally indicated that banks' policies regarding lending to businesses eased over the past three months and demand increased, on balance," the Fed said. "Banks that eased their (commercial and industrial) lending policies generally cited increased competition for such loans as an important reason for having done so."

Analysts viewed the report as a modestly bullish signal on the U.S. economy that indicated that benefits of Fed bond-buying program, known as quantitative easing, were steadily trickling into the economy.

"The broader easing and increased competition is some indication that the Fed's accommodative policy is beginning to be transmitted through more willingness to lend by banks," economists at UBS in New York wrote in a note to clients.

The Fed has held interest rates at nearly zero since late 2008 and bought more than $2.7 trillion worth of bonds to lower long-term borrowing costs, an aggressive effort to spur growth and hiring by encouraging investment and spending.

While many small businesses have reported frustration over their difficulty in securing credit, the Fed's survey showed there has been some progress on this front.

"In particular, a relatively large fraction of domestic respondents reported having eased standards on C&I loans, and moderate to large net fractions of such respondents reportedly eased many terms on C&I loans to firms of all sizes," it said.

The report was based on an opinion poll of 68 domestic banks and 21 U.S. branches and agencies of foreign banks.

"Bank lending is not the headwind that it has been in previous years," said Michael Gapen, an economist at Barclays Capital in New York.

CREDIT CRUNCH

The picture for household lending was more mixed.

A few domestic banks eased terms for prime mortgage borrowers, where demand increased for a fifth straight quarter.

Banks also said they had eased selected terms on auto loans, but reported little change in the terms for credit card and other consumer loans. Demand for auto and credit card debt strengthened over the last three months.

The poll found little change in the willingness of banks to lend to mortgage borrowers with FICO credit scores in the 680-720 range - a solid credit rating on a creditworthiness scale that goes up to 800. However, it said about one-third of the banks had pulled back on lending to less creditworthy borrowers.

Three-fourths of banks surveyed cited what is known as the "put-back risk" of delinquent mortgages by Fannie Mae and Freddie Mac "as an important factor restraining their current ability or willingness to approve home-purchase loans."

Put-back risk refers to the possibility that a mortgage sold by a bank to Fannie or Freddie turns out to have violated the underwriting guidelines of the two mortgage finance providers, in which case they can force the bank to buy it back.

Banks reported little change in their standards for loans to European banks. It was the first time there was no additional tightening since the Fed started asking this question in its October 2011 survey.

A prolonged European debt crisis has tipped the region back into recession with concerns flaring again in recent weeks over a bailout for tiny Cyprus.

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