Lending activity was mixed at banks in different regions around the country over the last six weeks, according to the latest report on economic and financial activity from the Federal Reserve’s 12 district banks, released Wednesday.
“Economic activity contracted sharply and abruptly across all regions in the United States as a result of the COVID-19 pandemic,” stated the Federal Reserve’s Beige Book (an informal snapshot of economic conditions based on input acquired as of April 6 and released Wednesday. “The hardest-hit industries – because of social distancing measures and mandated closures – were leisure and hospitality, and retail aside from essential goods. Most Districts reported declines in manufacturing, but cited significant variation across industries,” it stated.
For financial services, the Fed said Reserve Bank districts reporting on loan demand said it was high, both from companies accessing credit lines and from households refinancing mortgages. “All Districts reported highly uncertain outlooks among business contacts, with most expecting conditions to worsen in the next several months,” the report stated.
However, a district-by-district review of the report shows that, indeed, some banks are reporting sharp increases in financial activity, including loan demand – while others are showing modest or even sharp declines.
“Financial service businesses have noted widespread declines in activity and revenues,” the New York Fed reported. “Though only moderately pessimistic about the near-term outlook, finance sector contacts expressed widespread concern about maintaining adequate cash flow and collecting payables from customers.”
The Philadelphia bank reported that (by March 25), “reports from financial firms were starting to show signs of financial stress among firms and households.”
Cleveland, however, reported loan demand that was “unprecedented” (according to one banker). The bank said the banker reported that “one-month growth was likely to match what would typically be expected in a year.” Meanwhile, the Cleveland Fed said, corporate clients drew down credit lines to keep cash on hand in light of COVID-19-related revenue shocks, while consumers rushed to refinance home mortgages at lower rates.
The Richmond Fed reported moderate loan demand growth “due to an increase in construction financing and mortgage refinance loans.” Tepid loan demand was indicated for commercial real estate and commercial and industrial (C&I) loans, “though several banks mentioned that they anticipate strong demand for CARES Act SBA loans.”
Slower loan growth was reported by the Atlanta Fed, and some bankers indicated they were being more careful about underwriting, especially with residential and some commercial real estate properties, the report noted.
In Chicago, bankers reported that business loan volumes decreased moderately as greater uncertainty led borrowers to hold off on new loan requests. “That said, many businesses drew on existing lines of credit,” the Chicago Fed reported. “Lenders also reported a large number of requests for loan payment deferrals. Lenders indicated that they were actively working to implement the Small Business Administration’s (SBA) Paycheck Protection Program (PPP) and expected a large volume of applications.”
St. Louis was a district that reported demand for residential mortgages remained higher in early March, with banks reporting strong refinancing activity. However, banks reported that new activity for these loans has slowed and many rates have not yet been locked. “During the first week of April, the attention of banks abruptly turned to the SBA/PPP loan program, with bankers feeling overwhelmed by the program and unclear on how to approve firm applications and administer the loans,” the report noted.
On the Missouri River side of the same state as St. Louis, the Kansas City Fed reported that loan demand declined modestly in recent weeks, with decreases in commercial real estate loans, commercial and industrial loans, and consumer installment loans.
The Dallas Fed also reported a contraction in lending (“broadly,” in fact), led by declines in commercial and industrial lending. “The only exception was residential real estate loan demand, which increased during the reporting period. Loan pricing continued its marked decline, and credit standards tightened,” the district bank said.
And the San Francisco Fed noted that lending activity declined moderately “amidst ample liquidity.” “Reports noted that new loan origination fell sharply, and many banks received payment deferral requests from small business borrowers. Several banks readied emergency credit lines and expected credit quality to deteriorate as broad economic conditions turn for the worse,” the district bank stated.