Monday, January 30, 2012

Banks Report Stronger Business Loan Demand, Tighten Standards to Firms with Significant European Exposures

The Federal Reserve’s Senior Loan Officer Opinion Survey reported that domestic banks experienced stronger demand for commercial and industrial (C&I) loans from firms of all sizes. Fifteen percent of domestic banks, on net, reported increased demand for C&I loans from small firms, the highest level since 2005.

Domestic banks reported, on balance, little change in standards on C&I loans. A net 5.4% of banks reported tightening standards on C&I loans to large and medium borrowers, with a net 1.9% of banks reported tightening on C&I loans to small borrowers. Banks continued easing of pricing terms on business loans during the fourth quarter and also reduced their use of interest rate floors.

Domestic banks that reported having eased terms on C&I loans unanimously cited increased competition from other banks and nonbank lenders as a reason for having done so. The handful of banks that reported having tightened standards or at least one C&I loan term primarily cited a less favorable or more uncertain economic outlook and increased concerns about legislative, supervisory, or accounting policies.

A large fraction of domestic banks reported having tightened standards on loans to European banks or their affiliates and subsidiaries. There was also more widespread tightening of standards on loans to nonfinancial firms that have operations in the United States and significant exposures to European economies. This tightening of standards reflects prudential management of risks posed by the European debt crisis.

Read the report.

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