Lending standards continue to ease, demand is flat, July Loan Survey finds

By Sara Rosenberg

New York, Aug. 14 - Domestic banks continue to ease lending standards and terms on commercial and industrial loans, but many of these banks are seeing little change in demand for loans, according to the Federal Reserve July Senior Loan Officer Opinion Survey on Bank Lending Practices.

Over the past three months, about 10% of domestic institutions said that they had eased credit standards on commercial and industrial loans to large and middle-market firms, roughly the same percentage as in the April survey.

Of the eased standards for these large and middle-market firms, about 40% of domestic respondents, a significantly smaller net fraction than in April, reported that they had trimmed spreads of loan rates, about one-fifth indicated that they had reduced the costs of credit lines and smaller net fractions indicated that they had eased loan covenants and increased the maximum size of credit lines.

Credit standards on loans to small firms were reportedly little changed, on balance, in the July survey. But, about one-fifth of banks did indicate that they had trimmed spreads of loan rates.

More-aggressive competition from other banks or nonbank lenders was named as a prime reason for eased standards by nearly all the domestic institutions.

A notable net percentage also cited increased liquidity in the secondary market for these loans, a more favorable or less uncertain economic outlook and increased tolerance for risk as reasons for having eased credit standards.

On balance, demand for commercial and industrial loans from both large and middle-market firms and small firms were reportedly little changed in the July survey at domestic institutions.

Among those that had experienced stronger demand, almost 90% explained the strengthening by pointing to increased needs to finance mergers and acquisitions, while 80% cited borrowers' increased needs to finance investment in plant or equipment.

Among those that experienced weaker demand, about 85% attributed the softening to borrowers' decreased needs to finance investment in plant or equipment, while significant net fractions pointed to increases in customers' internally generated funds, decreased need for inventory financing, and a shift in customer borrowing to another bank or to nonbank sources of credit.

Regarding future business, domestic respondents indicated that the number of inquiries from potential business borrowers was little changed over the previous three months.

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