Demand for bank loans continues to fall, says Fed survey

By Sara Rosenberg

New York, May 10 - Banks continue to report a weakening of demand for commercial and industrial loans, according to the Federal Reserve Board's latest Senior Loan Officer Opinion Survey on Bank Lending Practices, covering the three months up to April. Additionally, the number of domestic banks that have tightened standards and increased loan rates also dropped from the previous survey.

Approximately one-third of domestic banks reported weaker demand for loans, down from one-half in January. Banks that experienced a decrease in demand cited a decline in need for bank loans to finance capital expenditures and about one-third said it was a "very important" reason, according to the survey. Also, banks reported lower demand for loans to finance mergers and acquisitions, inventories and accounts receivable. Six out of eight banks that reported an increase in demand said that it was due to a shift in borrowing from other bank or non-bank credit sources and identified a decline in customers' internally generated funds as a reason for higher loan demand.

The percentage of domestic banks that had tightened standards on commercial and industrial loans to large and middle-market firms decreased over the past three months to 25% from 45% in the previous survey. Tightening standards on business loans to small firms decreased to about 15% in April from more than 40% in January.

For large and middle market firms, the net fraction of banks that increased loan rates over the cost of funds fell to about 25% from 40% in January. A somewhat smaller net percentage of banks reported that they had tightened loan covenants and increased the cost of credit lines About 45% of domestic banks increased premiums charged on riskier loans, which is approximately the same percentage as was reported in the January survey.

For small firms, the net fraction of domestic banks that tightened covenants fell to about 12% from 40% in January. The net percentage of banks that increased spreads of loan rates over their cost of funds fell to 13% from 37%. And, the net fraction of banks that reported increasing premium charged on riskier loans dropped to 34% from 40% in January.

Banks that tightened standards on terms of commercial and industrial loans claimed it was a result of a lower tolerance for risk and expressed concerns about the economic outlook. About three-quarters of domestic and foreign respondents voiced the lower risk tolerance reasoning and about 70% of domestic banks claimed the uncertain economic outlook as a reason for changing standards, according to the survey. In January, only one domestic bank did not indicate that the economy was an important reason for tightening lending policies. In addition, only 10% of domestic banks said that the economic outlook was a "very important" reason, down from 40% in the previous survey.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.