Lending standards continue to ease; demand continues to grow, according to January loan survey

By Sara Rosenberg

New York, Feb. 7 - Domestic banks have continued easing standards and terms of commercial and industrial loans so far in 2005, just like what was seen in 2004, and demand for these loans has increased, according to the Federal Reserve Board's January Senior Loan Officer Opinion Survey on Bank Lending Practices.

One-fourth of domestic banks, on net, said they eased standards on commercial and industrial loans for large and middle-market firms over the past three months, about the same fraction as in recent surveys. Thirteen percent of domestic respondents also indicated that they had eased their lending standards for small firms, down from nearly 20% in the October survey.

On net, almost 50% of domestic banks trimmed spreads of loan rates over their cost of funds for large and middle-market borrowers, about the same fraction as in the previous survey. About one-fourth did so for small firms, down from nearly 40% in the October survey.

In addition, large fractions of domestic respondents indicated that they had eased other terms by increasing the maximum size of loans, loosening covenant restrictions, or reducing the costs of credit lines.

Almost all respondents that had eased their lending standards and terms over the past three months pointed to more aggressive competition from other banks or nonbank lenders as the most important reason. Large fractions of domestic banks also pointed to a more favorable or less uncertain economic outlook and a higher tolerance for risk as reasons for the easing.

About 45% of domestic institutions reported an increase in demand for loans from large and middle-market firms, up from about 25% in the October survey. Almost 30% indicated that demand from small firms had increased, about the same as in the previous survey. Furthermore, nearly 50% of domestic banks reported an increase in the number of inquiries from potential business borrowers, a larger fraction than in the October survey.

Consistent with the growth of inventories seen late in 2004, greater need for inventory financing was the prime reason given for increased loan demand. The second most important reason for increased demand was an increase in merger and acquisition activity. As was the case in previous surveys, large fractions of the respondents experiencing stronger loan demand also pointed to their borrowers increased financing needs for accounts receivable and for investment in plant and equipment.

Responses were received from 55 domestic banks.

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