Banks Loosening Loan Terms Worries Regulators
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Your Money Briefing. Money and market stories from the Wall Street Journal. I'm J.R. Whalen in New York. Some banks are facing an uphill battle in maintaining growth in business loans, and they're taking measures that have regulators worried. Details in a moment. First, these money headlines. Home price gains showed no signs of slowing in March, putting continued pressure on buyers as mortgage rates have also recently risen from to their highest level in years. The S&P CoreLogic Case-Shiller National Home Price Index that measures average home prices in major metropolitan areas across the U.S., it rose 6.5 percent in March, identical to the year-over-year increase reported in February. Home price gains accelerated in 2017 compared to the year before.
Nonetheless, economists expected the pace of price growth to slow this year due to a new tax law that passed in late February that reduced the incentive for home ownership, as well as rising mortgage rates that make owning a home less affordable. Meanwhile, rising gas prices and trade tensions with China haven't done much to temper confidence among U.S. consumers.
What are regulators worried about as banks loosen business loan terms?
Americans boosted their impressions of current economic conditions and raise their expectations for future conditions. A healthy job market is helping to support rising confidence. The unemployment rate stands at 3.9 percent.
How have home prices and mortgage rates changed recently and why does it matter?
That's the lowest since late 2000. The economy continues to add jobs at a steady clip. Other factors are helping underpin a surge in confidence, such as a sharp run-up in the stock market last year and the tax cut package that boosted Americans' take-home pay. This is your Money Briefing from The Wall Street Journal. Welcome back, everybody. The booming economy might make it seem like its happy days are here again for banks, but the banks are feeling the heat when it comes to business loans. And Wall Street Journal reporter Rachel Louise Ensign is here to discuss unusual measures they're taking to achieve growth. So, Rachel, a lot of banks are facing slow growth and stepped-up competition for clients.
This is in part due to tight rules they put into place following the recession about 10 years ago.
Basically, banks have pulled back on lending to certain business customers who are seen as riskier. And what's happened is that their commercial loan growth has really declined in the last few years. And there's no real consensus as to why. Some of it might be tied to tighter regulations. Some of it is probably not. But the fact of the matter is banks need to make these loans to grow and to make their profit projections. They're becoming a little bit more aggressive in their easing terms, and that's something that regulators are a little bit concerned about.
So they saw the growth increase after the recession, and then there was kind of a drop-off about two years ago.
Yeah. So basically what happened, it's kind of funny, in this area of commercial lending, after the recession, there was a huge revival in loan growth. And it was probably because businesses were borrowing more. They were rebuilding their businesses after such a horrible downturn. But even though it was a time that banks were complaining a lot about regulation and they were also complaining a lot about narrow profit margins because of low rates, it In reality, loan growth was pretty great. And then mysteriously, it just kind of ground to a halt around the 2016 presidential election. And banks are under a lot of pressure to improve it. They're getting questions about this constantly on earnings. And, you know, they've come up with like 10 different reasons why this might be the case.
And in order to get loan growth, they are easing terms for businesses. And that's kind of been working and it's been reviving a bit.
And as you point out in your Wall Street Journal story, what has regulators concerned is leniency that banks are giving to corporate borrowers, even in industries that are facing strain and might normally face more scrutiny.
Basically, what's happened is around 2017, so right around the time that loan growth started slowing, banks started making it easier to get a loan.
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