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Demand from small firms for bank loans increased  in the second quarter.
Demand from small firms for bank loans increased  in the second quarter.

Banks in US Loosen Terms for Business Loans

Banks in US Loosen Terms for Business Loans

About 17% of US banks have eased standards and terms on business loans to large firms in the second quarter, according to senior bank loan officers surveyed by the federal reserve. More than 10% eased those conditions somewhat for small firms.

For consumers, 6.5% of banks reported they had tightened standards on credit card loans. Standards for residential real estate and auto loans remained unchanged, MarketWatch reported.

The fed surveyed officers at 72 domestic banks. Bank officers said they were easing standards on business loans because of increased competition from other lenders. They also cited more a favorable economic outlook, increased tolerance for risk and increased liquidity in the secondary market for these loans as reasons for easing.

The fraction of banks saying that their subprime credit card lending standards are at the relatively tighter end of the range since 2005 has increased compared to a year ago.

The officers also said they were seeing stronger demand for business loans from small firms and weaker interest in commercial real estate loans.

Economists view the senior loan officer survey as a leading indicator of potential turns in the economy. For instance, a tightening of bank credit and a drop in demand would be a negative sign for the outlook. But that is not where the economy is now. Bank lending is running at a steady 5% annual rate, according to fed data.

“In aggregate, this represents a modest net easing of financial conditions, which reinforces the case for fed interest-rate tightening,” said Jim O’Sullivan, chief US economist at High Frequency Economics.

Other factors included increased tolerance for risk and increased liquidity in the secondary market, loan officers said.

US banks previously reported easing standards for many business loans and some commercial real estate loans in the first quarter, Reuters said.

The fed has raised interest rates seven times since it began a tightening cycle in December 2015, including twice so far this year. The fed is forecasting another two rate rises in 2018, with investors seeing further hikes in September and December.

Financial conditions have remained relatively loose even as policymakers continue to gradually raise rates amid a strong economy.

Banks also reported lending standards for residential real estate loans and auto loans were little changed, according to the survey. Some banks said they had tightened standards on credit card loans.

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