Tightening of lending standards still coming down, October Loan Survey finds

By Sara Rosenberg

New York, Nov. 9 - Domestic institutions continued to tighten their lending standards and terms on commercial and industrial loans over the past three months, but the amount continued to decline from the heights reached last year, according to the Federal Reserve October Senior Loan Officer Opinion Survey on Bank Lending Practices.

About 15% of domestic respondents, on net, reported tightening standards on loans to firms of all sizes over the past three months, about half of the net fraction that reported doing so in the July survey and substantially below the peak of around 80% that was reported in the October 2008 survey.

The net fractions of domestic respondents that reported having tightened selected terms on loans remained fairly elevated but generally continued to fall from the highs reported in late 2008.

Slightly more than 40% of banks reported increasing spreads, which represents a decline of about 20% from the July survey, and slightly less than 40% of respondents reported increasing the premiums charged on riskier loans to firms of all sizes.

Also, only 5% to 20% of banks reported decreasing the maximum maturity of loans or credit lines, decreasing the maximum size of credit lines, and tightening terms on loan covenants for loans to firms of all sizes.

The main reasons given for tightening credit standards or terms were the same as those reported in the previous three surveys - reduced tolerance for risk, an economic outlook that was less favorable or more uncertain and a worsening of industry-specific problems.

As for demand, notable net fractions of domestic banks reported weaker demand for loans from firms of all sizes, though the weakening was less widespread than in the July survey. In July, roughly 50% of domestic banks reported weaker demand for loans to firms of all sizes. That fraction fell to roughly 30% for loans to larger firms and to 35% for loans to smaller firms in October.

Reasons provided for reduced demand were similar to those in the July survey and included decreases in the need to finance investment in plant and equipment, inventories, accounts receivable, and merger and acquisition activity.

The survey also included a special question on the sources of the decline in commercial and industrial lending this year.

The two sources domestic banks cited most often as being "very" important were decreased originations of term loans and decreased draws on revolving credit lines.

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