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Tuesday, May 4, 2010

Fed: Business Loan Demand Continues to Weaken As Banks Cease Tightening of Credit Standards

The Federal Reserve’s April Senior Loan Officer Survey highlighted two trends in the business loan market: continuing weak demand and an end to the tightening of lending standards. Net business loan demand continued rebounding from the lows of early 2009 on signs of a widespread business rebound. However, net demand remained negative in the April survey, indicating a majority of firms still experienced declining demand. Survey results mirrored comments from 1Q earnings calls, which described signs of stabilization and the potential for future increases in business credit line utilization. Businesses’ own reductions in credit line borrowings were the largest source of loan shrinkage during this cycle. Business loan demand is nearing the corner, but has yet to make the turn.



The net percentage of banks tightening lending standards for business loans continued declining in April. The January survey noted the first net easing of business loan standards to large and medium firms; this April survey showed a slight increase in the share of firms that had eased standards. This was the first time since 2006 that the survey has reported two consecutive quarters of banks easing standards for this loan category. Banks cited increased competition from both other banks and nonbank credit sources, as well as either a more favorable or less uncertain economic outlook as reasons for changes in lending terms. Large institutions were responsible for the eased standards, as none of the smaller banks, which composed half of the respondent panel, indicated eased standards over the past quarter. Lending standards for smaller borrowers were essentially unchanged.

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