U.S.: Emerging Worrying Trends in Bank Lending

■ Loan demand quickly rebounds; Bank of America slightly relaxes lending standards in areas that are still considered strict. 

■ Be cautious of an economic slowdown due to rising non-performing loans from non-bank institutions, though a financial system crisis is not expected. 
 
   The Federal Reserve (FRB) released its latest Senior Loan Officer Opinion Survey (SLOOS) on October 4th. This quarterly survey, conducted by the FRB, gathers information from loan officers at U.S. financial institutions regarding changes in lending standards and funding needs compared to three months earlier. Participating institutions received questionnaires on September 22nd and submitted their responses by October 3rd. 

 
   For commercial and industrial loans (C&I loans) to large and medium-sized enterprises with annual sales exceeding $50 million, the demand index (DI) — representing the percentage increase or decrease in demand — was 11.5, shifting to positive from -28.6 in the previous July survey, indicating a rapid rebound in loan demand. Responses from various banks show that businesses are more willing to invest in equipment and acquisitions (M&A), and demand for accounts receivable financing has also risen. The lending standards DI (the percentage of banks tightening standards minus those easing them) was 6.5, down slightly from 9.5 in the previous survey, but still within a tighter range. Institutions responding with "tightening lending standards" cited industry-specific factors and decreased risk tolerance, along with economic uncertainty. Banks appear increasingly cautious amid rising credit risk following September’s subprime auto loan defaults. Conversely, banks indicating “easing lending standards" cited intense competition with other banks and non-bank lenders as their primary reasons. 

 
   Regarding household loan demand DI, credit card demand rebounded sharply (from -12.5 to 4.3), while auto loan demand declined significantly (from 5.8 to -19.2), reflecting credit concerns. In terms of lending standards, DI, the strictness of credit card lending eased (from 10.4 to 4.2), while auto loan standards became more lenient (from -3.8 to 5.8). New delinquency rates for the July-September period showed housing loans (3.67%) and auto loans (7.95%) declined month-to-month, while credit card delinquencies (8.58%) increased, indicating diverging trends. 
 
   Overall, demand for both business and household loans has increased, while lending standards have generally loosened. This rising demand and heightened competition, leading to more relaxed lending standards, present some concerning developments. As of October 22, outstanding loans from U.S. commercial banks to non-bank institutions totaled $1.7 trillion — a sharp rise from $1.1 trillion at the end of last year. The polarization of the U.S. economy is intensifying, and vulnerabilities are beginning to surface. The potential impact of increased non-performing loans from non-bank institutions on the economic slowdown warrants close monitoring. Meanwhile, financial institutions are continuing to bolster loan loss reserves, supported by the FRB’s funding mechanisms, and current assessments suggest that the risk of systemic instability remains low.