The Office of the Comptroller of the Currency (OCC) does an annual survey of its banks to determine credit conditions. Their report was just released and, as expected, there has been some easing of credit in the big banks, but little or no change in the small and regional banks where credit remains relatively tight.
Underwriting standards tightened for some commercial loan products and eased for others. The most prevalent tightening occurs in CRE loans, leasing, and small business loans. The most prevalent easing is in international, large corporate, asset-based lending, and leveraged loans. Large banks typically offer the products with the most easing.
For commercial loans, this is the picture:
The result is that 80% of lenders have tighter credit. If you look at the “unchanged” and “tightened” categories since 2008, lenders immediately tightened credit due to the economic crisis, and while they are not tightening more, they remain “unchanged” from their former tighter lending standards.
Here are the highlights of their report:
1. The results of this year’s survey show some signs of easing, especially in commercial products. Underwriting standards remain in transition as banks continue to react to economic conditions and changing risk in their portfolios. In certain products, banks are once again easing standards in response to competition, an improvement in credit market liquidity, and a desire for more market share. Approximately one third of responses, however, show banks continue to tighten standards for products with high losses. Generally, large banks have the highest share of easing credit underwriting.
2. Loan portfolios that experience the most easing in underwriting include indirect consumer, international, large corporate, asset-based lending, and leveraged loans. Loan portfolios that experience the most tightening in underwriting during the 2011 survey period include credit card, home equity, commercial and residential construction, and residential real estate loans.
3. As in the past, the health of the economy is a major factor influencing the tightening of credit standards. Expectations regarding the future health of the economy, however, differ by bank and loan product as examiners report that the economic outlook is one of the main reasons given for tightening or easing underwriting standards. Other factors influencing tighter underwriting standards are a change in risk appetite and product performance. Additional factors contributing to easing standards are changes in the competitive environment, market liquidity, and market penetration strategies.
For the weak commercial real estate market, credit conditions remain tight:
CRE remains a primary concern of examiners, given the current economic environment and some banks’ significant concentrations relative to their capital. While the majority of banks’ underwriting standards remain unchanged for CRE, net tightening, which measures the difference between the percentage of banks tightening and the percentage of those easing, is greatest in residential construction, followed by commercial construction, and other commercial real estate.
Credit conditions for small business loans remain tight as well:
… just over half of the banks have underwriting that remains unchanged, while one-third tightened underwriting. The focus of the tightening is on collateral and debt service requirements. Changes in the small business’s financial condition, combined with the economic outlook and quality and performance of the portfolio, are the major reasons for tightened credit. Competition and a change in market strategy are the main reasons for those easing credit underwriting standards.
As noted by the NFIB report last week on small businesses, most businesses believe they have adequate credit lines, but they are not borrowing because of economic and regulatory uncertainty.
It isn’t much better for you and me: retail credit remains tight:
Overall, 85 percent of community banks were identified as having conservative underwriting standards, while 57 percent of midsize and 60 percent of large banks were identified as having conservative underwriting standards. In addition, 40 percent of retail products in large banks had standards tightened versus 37 percent in community banks and 23 percent in midsize banks.
The bottom line: credit at the big banks is loosening up a bit, mainly because, as we have reported before, competition for market share as the majors try to invade the territories of small and regional banks. Again, the big lenders service large corporations and there is no real credit crunch there.
Where the problems still lie are with the regional and small banks with large commercial real estate loan portfolios. As the CRE market continues to decline, it puts their loans into greater jeopardy, and requires them to create greater loan loss reserves which restricts their ability to lend. This chart gives you an idea what they are facing:
This is the main problem with our banking system. The small and regional banks do most of the CRE lending in America and their balance sheets are tied up with problem loans, especially as asset values are declining on a national basis. This puts more pressure on these banks and restricts their overall ability to lend. This is a problem because they are the main financiers of SMEs (small to medium business enterprises) in America, the creators of half of the jobs in America. Also, small businesses are major holders of CRE and this affects their personal balance sheets and feelings about the future.
Credit will remain tight until these bad loans are resolved by either foreclosure or bankruptcy. We are witnessing the result of a money and credit boom created by the Fed. The damage is done on the way up as capital is malinvested into projects people don’t want. The bust is the unwinding of malinvestment and can’t be stopped. The more the Fed and the Administration try to prop up the economy, the longer it will take to repair, and the longer we will experience stagnation and high unemployment.
