Over the past five years, the credit market has been on a path toward gradual recovery from the recession driven fall in the value of credit extended to households and businesses. Immediately following the recession, which many economists blame on frivolous lending, access to credit declined in 2009 and 2010 for the first time in over 20 years. Changes in the regulatory environment geared toward regulating credit and systemic risk has since influenced lending practices over the past five years. Additionally, changes in the Basel regulatory framework (set forth by the Basel Committee on Banking Supervision) have also had an impact on banks’ ability to provide credit to customers. Over the five years to 2017, IBISWorld expects access to credit to increase at an annualized rate of 5.1% to $9.1 trillion. The rate of growth for loans held by banks has increased every year as the economy improved and financial institutions have large reserves available.
It is also noteworthy that 2015 and 2016 have seen the highest growth in access to credit since the recession. During these two years, the Federal Reserve initiated their plans to gradually increase interest rates, which triggered businesses and households to take on more credit to lock low interest rates. Additionally, improving economic conditions and increases in the quality of loan portfolios held by banks also encouraged greater lending. Higher demand for auto loans and strong growth in commercial and industrial lending, which is estimated to form a larger share of total outstanding credit as compared to commercial real estate loans’ share for the first time in several years, also increased the total amount of credit extended by banks to customers in the United States.
Access to credit is expected to keep growing over the next five years, though at a slower pace. The Federal Reserve has laid out a relatively aggressive plan to raise rates over the next few years with analysts noting a high likelihood of multiple hikes in 2017. Higher interest rates paired with the expected implementation of Basel III regulation in early 2019 will slow lending in 2017 and 2018. Higher interest rates mean higher borrowing costs; however, interest rates are still below historic levels and thus, access to credit is still expected to rise. Nonetheless, an increase in reserve capital requirements and various risk management regulations coupled with a desire to decrease risk-weighted assets to pass the Federal Reserve’s stress tests is expected to reduce the banking sector's ability to extended credit as freely as it did in prior years.
Since the financial sector received more time to comply with BASEL III (with compliance delayed from 2013 to 2019), so banks can get used to these new regulations and the regulations’ impact becomes clearer, IBISWorld expects that banks will start increasing the size of their loan portfolios in the second half of the period. Overall, IBISWorld expects access to credit to grow to $9.9 trillion in 2022, representing an annualized increase of 1.8% over the next five years.
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