After a long drought of high interest rates and choosy lending criteria, banks are beginning to open their doors a little wider to the business community. For the first time in 20 years, banks are lending as often, if not more, for businesses as they do for residential mortgages.
According to the Federal Deposit Insurance Corp.(FDIC) data released Wednesday, loans to the business sector rose 8.5 percent in the first quarter compared to the first quarter of last year. About 21 percent of the loans offered this quarter were given to the commercial sector, which is the highest percentage in 13 years.
Experts predict that if the loan rates continue to increase as they have been for the next year, there will be more commercial loans offered than residential ones for the first time since 1988. This is taking into account the fact that the amount of residential mortgage loans in the first quarter increased nearly two percent.
The rise in lending is largely a sign that major retailers, manufacturers, and other big businesses have been borrowing more often this last year in order to keep up with their rising interest rates. When major companies borrow, it gives the bank more financial backing and a little more freedom to lend to the smaller industries.
This is also an important landmark following the 2008 recession caused when borrowers couldn’t pay back their debts after the market crashed. Business lending has been accelerating ever since then, and this is a milestone for its progress.
Other contributing factors to this sudden increase include a stabilizing economy with a lower unemployment rate and a higher confidence in the current economy. Because investors are less afraid of the market crashing again, they are more willing to give out their money.
James Chessen, chief economist of the American Bankers Association (ABA) said in the ABA Statement on FDIC’s First Quarter Bank Earnings Report:
“People borrow when they feel they have the capacity to repay debt, and the comfort level of both businesses and consumers is increasing. Borrowing is likely to remain elevated as businesses look to jump-start expansion plans before an expected increase in rates by the Fed later this year.”
The first quarter balance sheet that was comprised of lending data from January through March showed that American banks had a balance of $8.362 trillion in loans. A record $1.749 trillion was loaned to the commercial sector, while $1.855 trillion was loaned for residential mortgages. As you can see, commercial lending is sneaking up to the mortgage level.
Banks are responding to meet commercial lending demands by increasing their resources in the commercial lending division. Brian Moynihan, CEO of Bank of America Corp., reports that their commercial lending division staffing has risen 11 percent to keep up with the demand.
“It’s a fight, [it’s] competitive out there in loan growth, but we’re seeing reasonable growth in the commercial side,” he says in response to the increased demand.
Banking profits are up, and the outlook is good for small businesses so far this year.