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Banks Ease Standards on C&I Loans Under Weakened Demand, Fed

November 07, 2017, 07:29 AM
Filed Under: Economic Commentary

The Federal Reserve released its Senior Loan Officer Opinion Survey on Bank Lending Practices for the month of October, which found conditions more favorable to business borrowers.

Regarding loans to businesses, respondents to the October survey indicated that, on balance, banks eased their standards and terms on commercial and industrial (C&I) loans and experienced weaker demand for such loans. Meanwhile, banks' standards on most categories of commercial real estate (CRE) loans remained basically unchanged, while demand for CRE loans reportedly weakened.

On balance, modest net percentages of banks reported that they eased standards for C&I loans to firms of all sizes over the past three months.3 Further, terms on such loans became less restrictive, on balance, with all loan terms either having been eased or having remained basically unchanged.

Specifically, for C&I loans to large and middle-market firms, a significant net percentage of banks reportedly decreased spreads of loan rates over their bank's cost of funds; moderate net shares of banks reportedly increased the maximum size of their credit lines, lessened their use of interest rate floors, and eased loan covenants; and a modest net share decreased the cost of credit lines. Banks also eased some terms for C&I loans to small firms: A moderate net fraction reportedly decreased spreads of loan rates over their bank's cost of funds and lessened their use of interest rate floors; a modest net fraction increased the maximum size of their credit lines and eased loan covenants; and banks reportedly left the cost of credit lines to these firms unchanged. Banks also reportedly left the maximum maturity of loans or credit lines, premiums charged on riskier loans, and collateralization requirements basically unchanged on net for all firm sizes.

Among the domestic respondents that reportedly eased their credit policies on C&I loans over the past three months, more aggressive competition from other bank or nonbank lenders was by far the most emphasized reason for easing. In particular, a majority of banks reported that more aggressive competition was an important reason for easing, with 14 of 29 respondents reporting it as a very important reason, while no other reason queried was cited by more than one bank as being very important.

Regarding the demand for C&I loans, a moderate net share of domestic banks reported that demand from large and middle-market firms weakened, while demand for such loans from small firms was reportedly unchanged on net. The reasons cited for weaker loan demand were less concentrated than the reasons for having eased standards. In particular, each of the following possible reasons for weaker demand was cited by at least half of the banks that reportedly experienced weaker demand: decreases in customers' needs to finance inventory, accounts receivable, investment in plant or equipment, and mergers or acquisitions. Meanwhile, inquiries from potential business borrowers regarding the availability and terms of new credit lines or increases in existing lines reportedly remained basically unchanged over the past three months on net.

A modest net share of foreign banks also reported easing their credit standards for C&I loans; these institutions also generally eased several terms on C&I loans. In particular, moderate net shares of foreign banks reduced the cost of credit lines and premiums charged on riskier loans while narrowing their spreads of loan rates over their bank's cost of funds. Also, modest net shares of foreign banks reportedly eased loan covenants and lessened their use of interest rate floors. Reportedly, foreign banks left the maximum size and maturity of loans or credit lines as well as collateralization requirements basically unchanged over the third quarter on net. Meanwhile, foreign banks reported that demand for C&I loans remained basically unchanged on balance. However, a significant net share of foreign banks reportedly experienced that inquiries from potential business borrowers regarding the availability and terms of new credit lines or increases in existing lines had increased in the third quarter.



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