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Fed: Banks Easing Lending Standards, Reduce Spreads on C&I Loans

May 07, 2013, 07:44 AM
Filed Under: Economy

According to the April 2013 Senior Loan Officer Opinion Survey on Bank Lending Practices issued by The Federal Reserve Board, domestic banks, on balance, reported having eased their lending standards and having experienced stronger demand in several loan categories over the past three months. The summary is based on responses from 68 domestic banks and 21 U.S. branches and agencies of foreign banks.

The survey results generally indicated that banks’ policies regarding lending to businesses eased over the past three months and demand increased, on balance. In particular, a relatively large fraction of domestic respondents reported having eased standards on C&I loans, and moderate to large net fractions of such respondents reportedly eased many terms on C&I loans to firms of all sizes. 

Banks that eased their C&I lending policies generally cited increased competition for such loans as an important reason for having done so. Demand for C&I loans also reportedly increased, but such reports were less widespread than in the previous survey.

On balance, respondents reported that they had eased most terms on C&I loans, regardless of firm size, and that no such terms were tightened. As has been the case for some time, there was considerable variation in the number of banks that reported having eased various C&I loan terms.

A very large fraction of respondents indicated that they had decreased spreads on C&I loan rates over their bank’s cost of funds for firms of all sizes. Moderate to large net fractions of banks again reported having reduced the cost of credit lines and decreased the use of interest rate floors for all firm sizes. In addition, about one-half of large domestic banks reported having eased loan covenants for large and middle-market firms in the April survey, up from 30 percent in the January survey.

Of the domestic respondents that reported having eased either standards or terms on C&I loans over the past three months, all but one cited more-aggressive competition from other banks or nonbank lenders as an important reason for having done so. About 40 percent of respondents that had eased their C&I loan policies cited a more favorable or less uncertain economic outlook as a somewhat important or very important reason. As in the previous survey, no other reasons were broadly cited by banks as being important for easing their C&I lending policies.

Meanwhile, responses from domestic banks indicated that the change in demand for C&I loans was mixed in the first quarter, with large banks reporting weaker demand for C&I loans, on balance, and other banks reporting stronger demand. Large banks also reported a net decrease in the number of inquiries from potential business borrowers regarding new or increased credit lines, while other banks reported net increases.

Banks reporting weaker C&I loan demand in the survey most often cited decreases in customers’ funding needs related to investment in plant or equipment as a reason. Banks indicating that C&I loan demand had strengthened cited increases in customers’ funding needs related to investment in plant or equipment, inventories, and accounts receivable as the top reasons.

Read the full April 2013 Senior Loan Officer Opinion Survey on Bank Lending Practices.

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