Loan standards, terms continue to ease; demand rising at slower pace, Fed survey finds

By Sara Rosenberg

New York, Nov. 7 - Lending standards and terms have continued to ease, and demand has continued to grow for commercial and industrial loans, however, the pace of these changes generally has slowed when compared to earlier this year, according to the Federal Reserve Board's October 2005 Senior Loan Officer Opinion Survey on Bank Lending Practices.

In the survey, nearly 10% of respondents reported having eased their credit standards on loans to large and middle-market firms, a somewhat smaller net fraction than in recent surveys.

In terms of spreads of loan rates over their cost of funds for large- and middle-market firms, almost half of domestic institutions, roughly the same net fraction as in the July survey, indicated they had trimmed rates.

Costs of credit lines were said to have been reduced over the past three months by about 30% of domestic respondents, a smaller net percentage than in the previous survey.

And about one-fifth of banks reported that they increased the maximum size and maturity of loans or credit lines and eased covenants on large- and middle-market company loans.

As for loans to small firms, only a few domestic respondents indicated they had eased lending standards, but almost 40% said they had trimmed spreads of loan rates over their cost of funds.

Once again, almost all domestic banks that reported having eased their lending standards and terms in the October survey cited more aggressive competition from other banks or non-bank lenders as an important reason for doing so. A substantial percentage of respondents also pointed to an increased tolerance for risk.

As for demand, 15% of domestic banks reported an increase in demand for loans from- large and middle-market firms over the past three months, a considerable reduction from the 40% that did so in the previous survey.

Among the domestic respondents that experienced stronger demand, most cited borrowers' increased financing needs for accounts receivable and inventories. A significant amount of these respondents also pointed to a rise in merger and acquisition activity and increased financing needs for investment in plant and equipment.

Regarding future business, about 15% of domestic institutions indicated that inquiries from potential business borrowers had increased over the past three months.

The survey also looked into the effects of the recent bankruptcy reform legislation, which took effect on Oct. 17. Overall, the impact is expected to be minimal, but about 15% of domestic respondents said credit losses on new loans to businesses are anticipated to be lower.

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