Lending standards continue to ease, demand grows, according to April loan survey

By Sara Rosenberg

New York, May 9 - Domestic banks have continued easing standards and terms of commercial and industrial loans, just like what was seen in 2004 and the beginning of 2005, and demand for these loans has increased, according to the Federal Reserve Board's April 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. Nearly one-fourth of domestic respondents also indicated that they had eased their lending standards for small firms, up from 13% in the January survey.

On net, almost 70% of domestic banks trimmed spreads of loan rates over their cost of funds for large and middle-market borrowers, up from 45% in the previous survey. About half did so for small firms.

In addition, many domestic respondents indicated that they had eased other terms for large and middle-market firms with 40% reducing the costs of credit lines and one-fourth increasing the maximum size of loans, loosening covenant restrictions, or both.

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 an important reason for doing so. About half, down from the previous survey's 60%, of domestic banks also pointed to a more favorable or less uncertain economic outlook. And, a notable share of respondents also said that a higher tolerance for risk and greater liquidity in the secondary market were reasons for the easing.

About 37%, down from 45%, of domestic institutions reported an increase in demand for loans from large and middle-market firms. The same net fraction of domestic respondents also indicated that demand from small firms had increased, up a bit from the previous survey. Furthermore, about 40% of domestic banks reported an increase in the number of inquiries from potential business borrowers, down from 50% in the January survey.

The domestic respondents experiencing stronger loan demand most frequently pointed to their borrowers' increased financing needs for investment in plant and equipment, accounts receivable and inventory financing as sources of increased demand.

Responses were received from 54 domestic banks.

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