Bankers increasingly expect chargeoff rates to rise for consumer and business loans during the rest of the year, the Federal Reserve Board said Friday.
The Fed's survey of senior loan officers showed that 43% of the banks polled expect consumer loan chargeoffs to rise. Households are beginning to suffer financial troubles, and consumers are more willing to declare bankruptcy, bankers said. Accepting some blame, bankers also told the Fed that aggressive loan solicitations have contributed to the trouble.
Fifteen percent of the lenders, however, expect consumer chargeoff rates to improve. These lenders said they have tightened credit standards and reined in credit card solicitations.
For business loans, 27% of bankers polled said they expect charge-offs to increase, while only 3% expect losses to fall.
Deteriorating balance sheets of business borrowers, worsening economic conditions, and looser lending standards will lead to higher chargeoff rates, according to the Fed's report.
The loan officer survey is a quarterly poll of officials at 59 domestic banks and 24 U.S. branches of foreign banks. The domestic institutions control nearly 40% of the industry's assets in this country.
Paul M. Dorfman, executive vice president for credit policy at Bank of America and vice chairman of Robert Morris Associates, said the industry should not overreact to the survey's results.
"For much of the banking industry, chargeoffs have been relatively low recently," he said. "So it is not surprising to hear that a fair number of credit officers expect an increase."
Banks also have spent the past year preparing for higher chargeoff rates. "People have been anticipating this," Mr. Dorfman said. "Banks have been preparing and reserving."
Harris S. Berger, senior risk manager at Fleet Financial Group, said loan officers are overestimating the increase in business loan chargeoffs.
"Some of these recent deals could have a tough time getting through a weaker economy," Mr. Berger said. "Banks are going to struggle. But I'm not sure they are going to lead to higher chargeoff rates."
Richard Spillenkothen, the Fed's director of banking supervision and regulation, said Friday the results are not worrisome because examiners already are watching this area closely. "We know when times are good, there is the possibility for banks to make mistakes," he said.
Overall, the survey found that most banks are loosening credit standards for business loans and tightening standards for consumer loans. These results are similar to findings in the May 7 Beige Book, the Fed's periodic review of the country's economic condition.
One in five banks with more than $15 billion of assets reported easing terms for middle-market business loans, while only 4% of smaller institutions eased. A few large banks also relaxed terms for small business loans. Standards for loans to large corporations were virtually unchanged.
One-third of banks said they cut back middle-market business lending, 25% reduced the fees charged for credit lines and eased loan covenants, and 10% lowered their collateral requirements.
Demand for middle-market and small-business loans rose at 10% of banks surveyed. Banks with increased loan demand said companies needed funds for investing in plants and equipment.
Commercial real estate loan demand rose at 10% of banks. Only 5% of bankers said they eased terms for real estate loans, but 90% said competitors lowered their standards.
On the consumer side, half the banks said they tightened underwriting standards for new credit cards and 20% said they tightened standards on other consumer loans. Forty percent said they lowered credit limits and 15% increased the spread between market rates and loan rates.
Lenders had mixed comments on home mortgage lending. More than a quarter of bankers said demand for mortgages was weaker, but 11% reported "substantially higher" demand, and 7.5% said demand was "moderately stronger."