August 7, 2021 / VOLUME NO. 169
Encouraging Signs for Loan Growth

For more than a year, loan growth has been anemic. Would-be borrowers have been flush with cash, in part from government aid and deferred spending during the pandemic. Beyond the Paycheck Protection Program, businesses haven’t been rushing to their bankers for loans. 

That may finally be changing. 

The July Federal Reserve Senior Loan Officer Opinion Survey, which published this week, reported that banks began to see increased loan demand for almost all loan segments in the second quarter. Demand for commercial real estate loans was up. Demand for commercial and industrial (C&I) loans increased. Even demand for consumer loans rose. This is great news, no doubt about it. 

“Trends have been moving in the right direction for the past couple surveys, but the most recent one is certainly the most encouraging …” analysts R. Scott Siefers and Brendan Nosal wrote in a note for the investment bank Piper Sandler & Co. “As one might expect, the only factor inhibiting even stronger responses seems to be strong customer cash positions.”

It’s still early to declare boom times, but there are other encouraging signs. Chris Marinac, director of research at the investment bank Janney Montgomery Scott, found that borrowers began increasing commercial lines of credit in the second quarter. “Yes, this is a nascent sign that commercial lending activity has improved, and both [third and fourth quarter 2021] should be important periods to repeat and strengthen this trend,” he wrote. 

The increases seem modest to be sure. But banks with significant C&I loans, which he defines as more than 15% of the portfolio, saw an average increase of 20% year over year in commercial lines of credit during the second quarter, according to data from the Federal Deposit Insurance Corp. 

Interestingly, banks show love to their customers by boosting lines of credit. When banks increase the maximum credit line, that also falls under the category of easing credit standards. When times are good, banks loosen their standards. When times are bad, or potentially could be bad, credit lines go down. Banks increase collateral demands, and prospective borrowers must meet heightened credit standards.

Many people don’t understand this aspect of banking; they figure that banks should offer more loans when times are bad. That’s not how it works. Banks must carefully guard their credit to ensure continued existence on the face of the earth. An improving economy and better borrowers, who have more cash on hand and are seeing demand pick up in their businesses, translates into easier lending standards. And that’s where we are. 

• Naomi Snyder, editor-in-chief of Bank Director
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