Banks starting to loosen reins on credit

Winter is approaching, but at least one important sign suggests the U.S. economy is thawing: Borrowers are having an easier time getting credit.

According to the Federal Reserve's latest Senior Loan Officer Survey, overall lending standards were either easier or unchanged over the past three months. Demand for commercial and industrial loans rose as credit standards eased.

Although credit card, auto or other consumer loans remain tight, more banks are expected to ease lending standards on plastic, home mortgages and business loans in the fourth quarter, which may help holiday sales. On the business side, credit criteria for construction and land development loans were eased, while demand for auto loans rose.

The loosening in commercial lending "is encouraging, since smaller firms are more likely to use bank loans to boost investment in new capital equipment and/or increasing employment," said Paul Ashworth, chief U.S. economist at Capital Economics, in a note to clients. "Large firms looking to fund equity buybacks or boost dividend payments would normally raise those funds in the corporate bond market."

Still, although banks are easing lending standards around the edges, they remain far pickier than before the 2008 financial crisis. Former Fed Chairman Ben Bernanke even joked about recently getting turned down by a bank when he tried to refinance his mortgage. And certainly financial institutions aren't interested in reverting to the kind of reckless lending that prevailed before the crash.

"I think [Bernanke] could have gotten it done in 2007," said Fred Cannon, an analyst with Keefe, Bruyette & Woods, who has followed the sector for 30 years. "Credit standards are far tighter today then they were back then."

The key issue for banks is when will the Federal Reserve hike its benchmark rate from current historically low levels of near zero percent. Although Fed Chair Janet Yellen warned investors in September to be prepared for increases sooner rather than later, many experts don't expect the first hike until mid-2015, and then for the central bank to slowly increase rates over a period of many months.

Shares of financial services firm have been a mixed bag for investors this year. Wall Street titans such as Goldman Sachs (GS), JPMorgan (JPM) and Citigroup (C) have all posted gains, although they've underperformed the S&P 500 index, which has posted an increase of almost 9 percent. Shares of Bank of America (BAC) and Wells Fargo (WFC), leaders in home lending, have gained 10 percent and 17 percent, respectively.

Yet plenty of challenges remain for the sector as it tries to shake off the lingering affects of the worst financial crisis since the Great Depression. Citigroup (C), for one, recently announced that it was exiting consumer banking in 11 markets as CEO Michael Corbat seeks to boost profits.

"Regulatory obstacles remain, creating a Big Brother banking environment," wrote Mike Mayo, a veteran banking analyst at CSLA, in an email. "As a result, the key word is 'selectivity,' especially for banks such as Citigroup which are undergoing historic restructuring."