Lending standards and terms tighten; demand slows down, October Loan Survey finds

By Sara Rosenberg

New York, Nov. 5 - Domestic institutions tightened their lending standards and terms on commercial and industrial loans over the past three months and demand for these loans has weakened, according to the Federal Reserve October Senior Loan Officer Opinion Survey on Bank Lending Practices.

For large and middle-market firms, about one-fifth of domestic institutions reported that they had tightened their lending standards over the past three months.

The fraction of domestic institutions that increased spreads of loan rates over their cost of funds increased sharply in the October survey to about one-third and significant net fractions of banks indicated that they had increased the cost of credit lines and premiums charged on loans to riskier borrowers.

Regarding non-price-related terms, about one-fifth of domestic banks, on net, reported more stringent covenants on loans to large and middle-market firms.

For small firms, smaller net fractions of domestic banks reported that they had tightened their policies over the past three months.

On net, about one-tenth of respondents, a fraction similar to that in the July survey, reported tightening their lending standards to small firms and about one-fifth of domestic institutions reported charging higher loan rate spreads on such loans.

All respondents said that lending standards and terms were tightened as a result of a less favorable or more uncertain economic outlook.

Large majorities of respondents also cited decreased liquidity in the secondary market and reduced tolerance for risk as reasons for a move toward more stringent lending policies.

Relatively few respondents indicated that concerns about their banks' capital or liquidity positions had contributed to the tightening of lending standards and terms.

As for demand, about one-sixth of domestic respondents noted weaker demand from large and middle-market firms, and less than one-tenth of banks indicated weaker demand from small firms.

Regarding future business, about 15% of domestic respondents reported that the number of inquiries from potential business borrowers had decreased relative to the previous three months.

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