1 Record of Meeting of the Federal Advisory Council and the Board of Governors Friday, May 17, 2013

Item 1:

Current Market Conditions What is the Council’s view of the current condition of, and the outlook for, loan markets and financial markets generally?

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Overall loan demand continues to be suppressed by borrowers’ uncertainty, especially about the fiscal outlook.

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Lender competition for the relatively weak loan d emand has resulted in lower spreads and riskier balance sheets.

(A) Small Business Lending:

Has credit availability for, and demand for credit from, small businesses changed significantly recently? Have there been changes in lending standards for these borrowers?

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Small business owners are generally apprehensive to grow and increase spending. They continue to look for more positive signs in the economy, and they lack confidence in Washington’s ability to resolve federal budget problems or formulate and follow a sustainable fiscal policy. Small businesses remain conservative in their borrowings. Due to low borrowing and investment rates, cash is often used for capital spending when it does occur.

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With weak demand, competition for lending to small businesses is intense, particularly for credits with lower risk profiles. Several members report that lending standards at smaller banks appear to be loosening, while larger banks have not changed. Smaller banks are offering very competitive pricing and/or looser structural elements. Personal guaranties are commonly being sacrificed in competitive situations.

(B) Commercial Real Estate Lending

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Have there been any changes in the Council’s view of the challenges in the commercial real estate market? How are commercial real estate loans performing compared to your expectations?

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Leasing activity in office, industrial, and retail real estate has been improving, but vacancies remain relatively high. These property types are reliant on true economic growth to generate demand and have therefore lagged the recovering performance of some other property types.

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