Should Banks Lend More?

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U.S. banks seem willing to start lending again but only to ‘safest’ borrowers, according to the Senior Loan Officer Survey on Bank Lending Practices for the month of April, released by the Fed yesterday.

19% of the survey respondents said that they have “eased somewhat” lending standards for large and middle-market firms, while about 81% said that standards remained unchanged. The number was slightly more positive for small firms, with 23% of the respondents reporting easing of standards.  Many banks cited “increased competition” for business loans as the main reason for easing their standards.

However mortgage lending standards to individual borrowers remained more or less unchanged, while the demand for prime mortgages continued to pick up.  A few banks reported having eased their standards on prime residential mortgages but the standards for nontraditional mortgages were little changed.

 “Modest net fraction of banks were more likely to approve an application with a FICO score of 720 and a 20% down payment… but modest to moderate net fractions of banks indicated that they were currently less likely to approve such loan applications with a FICO score of 620, depending on the down payment”.

Light tending standards have been hurting the recovery since many prospective borrowers can not take advantage of low interest rates. At the end of 2012, banks had lent out less than 70% of their deposits (a multi-decade low), down from 93% just before the financial crisis.

While it is true that loose lending standards were partly responsible for the financial crisis, many banks still remain reluctant to lend to creditworthy borrowers (but with less than stellar credit).

Do you think that banks’ unwillingness to lend more remains a headwind to economic recovery? 

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