Business loans increase sharply during COVID-19

The economic shocks that affected the global economy in the spring of 2020 prompted a renewed focus on the extent to which the nation’s banks can provide economic assistance to affected individuals and businesses. Amid the uncertainty, banks had to juggle liquidity risk, customer expectations and regulatory guidelines.

Data for this period shows that commercial loans increased significantly during the first few months of the pandemic, while consumer loans declined moderately. Studying these changes provides valuable insight into how sectors handled the crisis and how the economy responded, while providing important lessons for the future.

A growing body of research from the Federal Reserve is shedding light on financial trends during COVID-19. A couple of examples include a look at the impact of the pandemic on Black-owned businesses and an analysis of small business loans. This article seeks to provide an overview of national and regional credit trends and information on the long-term outlook for the banking industry.

Bank loans during the peak of the pandemic

As COVID-19 cases continued to rise and more restrictions were put in place during the spring of 2020, many business owners had to apply for new loans to maintain their businesses. This caused commercial and industrial (C&I) loan growth to skyrocket in May, growing over 29%, as shown in the first figure. Small business participation in the Paycheck Protection Program (PPP) was a major contributing factor to this high growth. As businesses continued to seek relief funds, many banks reported being overwhelmed by the volume of requests after the program launched in early April.

In contrast, in May 2020, consumer lending at all commercial banks fell below their year-ago levels for the first time since December 2011. This 1% drop in consumer lending and a 6% year-over-year decline % in credit card loans, meant changes in consumer spending behavior induced by the pandemic. Through most of the global financial crisis of 2007 to 2009, consumer lending continued to rise as incomes fell and households borrowed to maintain their normal spending levels.

As households lost confidence in the future of the economy in 2020, many began to save more and borrow less. This behavior, combined with the first round of federal relief checks, caused deposits at all commercial banks to rise more than 15% year-over-year in April 2020, the fastest increase in 45 years. He the personal savings rate also increased to a record 34% in April 2020, up from 8% in February 2020.

While home loans experienced little to no change at the start of the pandemic, their growth began to slow in late 2020, as shown in the second figure. Residential real estate loans (RRE) on the books of commercial banks experienced a decline, with growth turning negative in November 2020. Commercial real estate loan (CRE) volumes, while facing a less pronounced decline, grew by less than 2 % in May.

However, government-sponsored enterprise (GSE) loans originated by banks and non-banks increased significantly, indicating sustained demand for mortgages. Additionally, many mortgage lenders have reported an increase in refinancing applications during the start of the pandemic; the MBA refinance rate increased more than 130% year-over-year in May 2020. This boom in refinance activity was likely the result of homeowners trying to lock in historically low mortgage rates.

stricter standards

In addition to changes in demand, these credit trends could also allude to some changes on the supply side. The pandemic caused many lenders to make significant changes to their lending policies to offset risk; these changes included tightening lending standards and conditions and increasing loan-loss reserves. Throughout 2020, banks reported continued tightening of C&I and CRE lending rulesciting a “less favorable economic outlook” and “worsening industry-specific problems” as main reasons.

On the consumer side, banks also tightened standards for consumer and RRE loans during the first three quarters of 2020. Standards for consumer loans were relaxed during the fourth quarter, while standards for RRE loans remained unchanged. without changes. Tighter lending standards and terms reduced the supply of credit, leading to a decline in loan volumes.

Banking conditions in the Eighth Federal Reserve District mirrored those of the nation, with some small variations. As shown in the table, C&I loans in the Eighth District saw larger increases compared to the national average, growing more than 30% year-over-year from early June to early December 2020.

On the other hand, Eighth District banks reported less severe declines in consumer loan growth relative to national trends. Real estate loan growth, driven in part by strong demand for RRE loans, increased slightly in the District in June 2020 before trending downward.

long term perspective

The economic outlook has improved significantly since the beginning of the year. In it January 2021 Senior Loan Officer Opinion Survey, banks reported that they anticipate higher demand for consumer loans and all categories of commercial loans over the next 12 months, but weaker or unchanged demand for RRE loans. Credit performance was expected to deteriorate somewhat for most consumer and commercial loan categories. The only exception was commercial and industrial loans to large and medium-sized companies, for which banks expect credit quality to improve.

To offset the risk associated with deteriorating loan performance, banks that participated in the January survey expected to tighten credit standards on most commercial loan categories. However, these expectations differed depending on the size of the bank; On net, the big banks expected to ease credit standards, while the smaller banks expected to tighten them. On the contrary, banks expected the rules for granting loans to households to be relaxed. Credit conditions have improved in recent months and for the April pollbanks indicated that they generally relaxed standards in most categories of commercial and consumer lending.

While demand for commercial and industrial loans for large and medium-sized businesses declined during the first quarter, banks saw stronger demand for some categories of consumer loans, particularly residential mortgages and auto loans. Additionally, bank contacts for the Federal Reserve Bank of St. Louis Beige Book highlighted high asset quality, ample liquidity and record first-quarter 2021 earnings. They also anticipated mortgage business and PPP loan revenue. to further enhance your earnings.

Overall, participating banks were able to help absorb the initial economic shock caused by the pandemic in 2020 and are now cautiously optimistic about 2021.