Stress test relief seen unlikely to spur lending

By Kristina Cooke - Analysis

NEW YORK (Reuters) - Results of a government test of how the biggest U.S. banks would fare in an even more punishing economic environment are unlikely to spur a major pick-up in lending, though they may remove some of the uncertainty in the banking system.

While banks may be less hesitant to lend to each other if they feel their rivals' books have been credibly vetted, that does not translate into confidence to make new loans to small businesses and consumers, analysts said.

Thursday's announcement may therefore have a limited effect on the broader economy.

"It makes banks access to liquidity easier, but it doesn't necessarily make them more prone to lending to" other businesses, said Michael Feroli, economist at J.P.Morgan.

Feroli said the state of the economy means many borrowers' creditworthiness has dropped, while demand for new loans has also waned. Consumers faced with losing their homes or losing their jobs are likely to hunker down rather than take out loans for new cars, for example.

"There are three constraints. The demand side is going to be weak because of the economy and on the supply side you have the reduced creditworthiness of borrowers and capital constraints, so you're only presumably taking away one of those," Feroli said.

"So I wouldn't expect a big pick-up in lending after the stress tests," he said.

The Fed's most recent survey of bank loan officers showed further weakening of demand for commercial and industrial loans, Fed chairman Ben Bernanke noted in his May 5 testimony to the congressional Joint Economic Committee. It also showed that the net fraction of banks that tightened their business lending policies "stayed elevated", he said.