Inquiries slow down; credit standards expected to tighten, July Loan Survey finds

By Sara Rosenberg

New York, Aug. 13 - Some domestic banks are seeing fewer inquiries for commercial and industrial loans, and lenders are expecting credit standards to become more stringent over the next few months, according to the Federal Reserve July Senior Loan Officer Opinion Survey on Bank Lending Practices.

On net, about 15% of domestic respondents reported that the number of inquiries from potential business borrowers had decreased over the past three months, a somewhat larger fraction than in the April survey.

Both domestic and foreign banks expect a tightening of credit standards and terms in the syndicated loan market in coming months, in part because of a very large number of deals in the pipeline.

About three-fourths of the domestic respondents and almost all foreign respondents expect tighter lending standards, an increased number of covenants or more stringent covenants, and wider loan rate spreads.

And, about two-fifths of the domestic respondents and about three-fifths of the foreign respondents expect a reduction in the size of the loan portions of financing deals and the introduction of call protection or original issue discounts on loan deals.

As for past business, over the three-month timeframe, some respondents indicated that they had eased terms on loans, while 15% of U.S. branches and agencies of foreign banks reported having tightened credit standards on such loans over the same period.

About one-third of respondents, a smaller net fraction than in the April survey, indicated that they had trimmed spreads for firms of all sizes.

Smaller net fractions reported that they had reduced the costs of credit lines and eased loan covenants to large and middle-market firms, and had reduced the costs of credit lines and lowered premiums charged on riskier loans to small firms.

More-aggressive competition from other banks or nonbank lenders was named as a primary reason for eased standards or terms by nearly all respondents.

Institutions that tightened credit standards pointed to a less favorable or more uncertain economic outlook, a reduced tolerance for risk and decreased liquidity in the secondary market as the most important reasons for doing so.

As for demand, about one-fifth of domestic banks noted that they had experienced weaker demand for loans from large and middle-market firms, and around 10% reported that they had experienced weaker demand from small firms.

And, one-fifth of U.S. branches and agencies of foreign banks reported stronger demand for loans over the past three months.

The most frequently cited reasons for weaker demand at domestic banks were borrowers' decreased need to finance inventories or investments in plant or equipment, or that customer borrowing shifted to other bank or nonbank credit sources.

Domestic and foreign institutions that reported an increase in demand for loans mainly pointed to customers' greater financing needs related to merger and acquisition activity.

Banks received the survey in mid-July, and their responses were due July 26.

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