Monday, August 16, 2010

C&I Loan Terms & Standards Ease, Demand Unchanged in Fed's July Survey

According to the July Federal Reserve Senior Loan Officer Opinion Survey, domestic banks reported easing standards and most terms on C&I loans to firms of all sizes, a move that continues a modest unwinding of the widespread tightening that occurred over the past few years.

A modest net fraction of domestic banks eased standards for lending to large and middle-market firms over the previous three months—the second consecutive survey showing such an easing. Moreover, this is the first survey that has shown an easing of standards on C&I loans to small firms since late 2006.

Many banks eased terms on C&I loans, as they had reduced spreads of loan rates over their bank’s cost of funds and trimmed the costs of credit lines. Domestic banks also reported that they had stopped reducing the size of existing credit lines for commercial and industrial firms, on net—the first time that banks had not reported cutting such lines since these questions were added to the survey in January 2009.

Nearly all banks that reported easing standards or terms on C&I loans cited more aggressive competition from other banks or nonbank lenders (other financial intermediaries or the capital markets) as an important reason for doing so, and about one-half of the respondents that eased pointed to a more favorable or less uncertain economic outlook.

On balance, demand for C&I loans from large and middle-market firms and from small firms changed little in the July survey. In comparison, the April survey reported weaker demand from firms of all sizes.

Banks that experienced higher C&I loan demand attributed the improvement to customers shifting funding needs from other credit sources to banks and customers’ increasing need to finance inventory and receivables. Also, loan demand for investments in plant or equipment increased in July relative to the April survey.

About 20 percent of respondents, on net, said inquiries on the availability and terms of new C&I credit lines increased over the last three months.

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