Capital Economics: ‘Surge’ in US sub-prime lending is not concerning

Capital Economics says the recent increase in bank lending to sub-prime borrowers in the US is not yet a cause for concern and instead reflects the broader improvements in the US economy.

Bank loans in the US have risen 5.5 per cent in the year to July, marking the fastest increase recorded in five-and-half years, according to Capital Economics senior US economist Paul Dales.

The latest Fed senior loan officer survey highlights that this growth in bank loans is tied to what Dales describes as “recent widespread loosening in lending conditions” that has in turn been driven by a surge in lending to sub-prime borrowers.

Some concerns are now being raised over whether lending criteria has become lax but Capital Economics points out that even with this recent increase loans to sub-prime borrowers “remains below pre-recession levels.”

It says: “There are some concerns that lending criteria have been relaxed too much. For example, the 11 per cent surge in auto loans in the year to the second quarter is largely due to a rise in lending to borrowers with credit scores of less than 660.

“We’re not too concerned, though, when the value of auto loans made to such sub-prime borrowers remains below pre-recession levels.”

Dales argues alternatively that the surge in bank loans is more a reflection of the improvements in the economic outlook.

He says: “The recent rapid rise in bank loans, which is partly being driven by auto loans, is not a cause for concern and instead is a sign that the economy is becoming stronger.

“The stronger demand for loans reported by banks implies that loans to businesses will continue to rise rapidly. What’s more, since corporate bond issuance has remained strong, total business borrowing is rising.

“Overall, the further acceleration in the growth rates of broad money and bank loans is a sign of economic strength, not weakness.”