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Fed forecasts rising credit quality in ’13

– U.S. banks expect credit quality to rise in 2013 after they eased standards on loans for autos and businesses of all sizes, according to a Federal Reserve survey.

“Banks expect improvements in credit quality in most major loan categories” in 2013, the central bank said last week in its quarterly survey of senior loan officers released in Washington.

The number of banks with such an expectation was described as “moderate to large.”

Business lending standards were “eased somewhat for all firm sizes” and banks “again eased standards on auto loans,” the Fed said in its report.

Standards for mortgages and credit card loans were little changed, the survey said.

The report bolsters the Fed’s view that a slump in economic growth during the fourth quarter was temporary, and that record-low interest rates will help fuel the recovery as credit thaws.

The Fed said last month growth “paused,” following a report that the economy shrank at an annual rate of 0.1 percent in the fourth quarter.

The Federal Open Market Committee said in a Jan. 30 statement that growth will “proceed at a moderate pace and the unemployment rate will gradually decline.”

The survey of loan officers at 68 domestic banks and 22 U.S. branches and agencies of foreign banks was conducted from Dec. 27 to Jan. 15, the Fed said. The report didn’t identify respondents.

Banks expect to see “improvements in delinquency and charge-off rates during 2013 for most loan categories included in the survey,” the Fed said. Business loans, commercial real estate loans, and residential mortgages are all expected to improve.

“Among major loan categories, domestic banks were least likely to expect improvement in the quality of consumer loans in 2013,” the report said.

Demand for business loans, prime residential mortgages, commercial real estate lending and auto loans strengthened, the survey showed.

Increasing competition to make loans to businesses has forced banks to lower their standards, according to the survey.

“Almost all respondents that reported having eased either standards or terms over the past three months cited more aggressive competition from other banks or nonbank lenders as an important reason for having done so,” the Fed said.

The report was prepared for the Jan. 29-30 meeting of the FOMC, at which the central bank maintained its $85 billion a month of mortgage-bond and Treasury purchases designed to propel the economy toward full employment.

Boston Fed President Eric Rosengren, an FOMC voter this year, sees Fed accommodation working, citing recent improvement in the housing market and auto sales.

Carmakers sold 15.23 million vehicles at an annual pace in January, up 9.6 percent from a year earlier.

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