Fed: Banks Reverse Corporate Lending Slump

In a sign of strength for the U.S. economy, banks are reporting that business loans are on the rise. According to The Wall Street Journal, preliminary second-quarter data from the Federal Reserve indicates that the year-over-year growth rate of business loans rose to 5.5 percent in late June from less than 1 percent near the end of 2017. Data also shows that business loans are growing faster at small and mid-sized banks, which usually focus on businesses outside of the largest corporate firms.

“We’ve been waiting for this ever since the 2016 election,” said Scott Siefers, a bank analyst at Sandler O’Neill + Partners.

The rise comes after a prolonged slump in business-loan growth that began a few months before the 2016 presidential election. Lending growth, which had exceeded 10 percent for much of the prior two years, fell into single digits. While most bankers expected a rise after Republican President Donald Trump’s win, loan growth actually continued to fall to a rate of around 0.5 percent in December 2017. Some blamed the low numbers on competition from non-bank lenders or a lack of confidence due to political upheaval.

The reason for the recent rise is also tough to pinpoint. Many analysts say its because businesses have a more optimistic economic outlook, while some bankers believe it’s due to mid-sized clients  planning to expand.

“Businesses no longer have an excuse not to borrow. Whether it was the election, deregulation or taxes — now we have the answer to all three,” said Chris Marinac, director of research at FIG Partners. “They have every reason in the world to take on debt and expand.”

Though a higher number of loans issued is good news for banks’ earnings reports, there are concerns that financial institutions (FIs) might be making the loans with looser terms, which could cause problems in the future. In fact, the Office of the Comptroller of the Currency (OCC) identified in a recent report that the easing of commercial loan standards is a top risk in the banking industry. While the rate of bad business loans remains low, the OCC said that, during the past year, it privately issued more warnings, ordering FIs to change their business lending practices.