There is an opinion survey from the Federal Reserve Board that indicates banks have been loosening their lending terms lately. The senior loans officers survey conducted in April 2018 addressed several categories including household lending, commercial lending, as well as real estate lending.
The study shows that most, if not all, U.S. banks are loosening lending policies across all three major categories. There are indications that the practice is cutting across the banking industry as foreign banks follow suit and do the same thing across all three categories.
The simple answer to this question is that banks are loosening lending standards in a bid to attract more borrowers. The global financial crisis experienced in the wake of the housing market crash in 2008 led to the adaption of stricter lending policies by banks the world over. However, since then, more non-bank financial institutions have come into the picture, and the aggressive competition they pose to traditional banks has led to a review of lending strategies and policies.
Other factors that led to this decision include:
The greatest factor, however, is the fact that non-bank lenders have found a footing in the industry after banks tightened their lending practices due to the 2008 crash. This means that banks now have to compete with a section of the lending market that does not necessarily adhere to the old “tried and tested” stringent rules that most banks use to ensure coverage for their positions when they loan out money.
Most of these new lenders do not even take credit scores or credit histories into account when dealing with borrowers. Even though they are a bit more expensive when compared to banks, the fact that they are a lot more accessible makes them the first choice for many borrowers who have poor to bad credit.
While it is true that loose lending policies were a big part of the recent real estate crash, the fact of the matter is that, if managed properly, loose lending policies can actually spur the growth of an economy. Here are some advantages that come about with banks loosening their lending policies:
While these advantages are essentially good for the economy and the well-being of the borrower and the lender, to some extent, it is still not without its risks.
Yes, banks are loosening their lending policies to attract more customers and spur economic growth, but is it really for the best? In an economy where there are more responsible than irresponsible borrowers, yes, it is for the best. But are we that economy?
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