WASHINGTON Credit terms and standards continued to ease last quarter, and demand for business loans surged, according to a new Federal Reserve Board report.

The Fed's survey of senior loan officers found that both businesses and households were receiving easier credit. Middlemarket firms, in particular, benefited from the trend, according to the poll.

In large part, the easier conditions reflect an improving economy. But they also could be the first sign of future trouble in the banking industry, according to one economist.

Recession May Loom

"If the pattern continues, one might begin to worry," said Sung Won Sohn, chief economist for Norwest Corp., Minneapolis.

By 1995, he said, "there is a high probability of a slowdown or recession, and a lot of lenders could get caught."

Already, some banks report concern about casing loan terms and conditions.

"The consumer area, especially auto lending, is an outright disaster," said David Littmann, chief economist for Comerica Bank-Detroit. "Lenders are making loans like crazy."

His bank, he said, got out of auto lending about six weeks ago when it became apparent that market rates didn't allow for an adequate profit.

"So far, that looks like a pretty good decision," he said.

In Line with Earlier Reports The May survey is consistent with a number of earlier reports on lending conditions. The February survey also found easier terms and standards for commercial and industrial loans, and slightly easier standards for commercial real estate loans.

The main reason cited for easier terms and standards was increased competition. Other reasons include the improving economy and lessening of industry-specific problems.

A principal reason for easier standards, said Norwest's Mr. Sohn, is the weakening bond market.

"In the past two or three years, banks relied heavily on bonds," he said. "You could make good money because of the huge positive carry between the federal funds rate and the rate for Treasuries. That's no longer the case; banks are looking for higher-margin businesses."

Traditional Route

In short, he said, banks are beginning to return to the traditional business of making money from C&I loans.

However, at the same time that banks were aggressively courting commercial borrowers, they were stepping up their purchasing of Treasury and agency securities, the Fed report said. In large part, that was an effort to take advantage of declining bond prices.

The Fed asked lenders how they were responding to new accounting rules requiring that more securities be marked to market. The most common response, the report said, was to decrease the maturity of security portfolios.

Lenders reported an increased willingness to make loans to individuals.

"More than a quarter of the respondents indicated greater willingness to make consumer installment loans," the report noted.

Mortgage lending was an exception to the patterns found in other types of loans.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.