Survey: Tightening of lending standards continues down, but still high

By Sara Rosenberg

New York, May 4 - The number of domestic institutions that tightened their lending standards and terms on commercial and industrial loans over the past three months is still at an elevated level, but the amount continued to decline for the second consecutive survey, according to the Federal Reserve April Senior Loan Officer Opinion Survey on Bank Lending Practices.

On net, about 40% of domestic respondents, compared with around 65% in the January survey, reported having tightened their credit standards on loans to firms of all sizes over the previous three months.

About 80% of domestic banks indicated that they had increased spreads of loan rates over their cost of funds for loans to large and middle-market firms, compared with around 95% in January.

And, about 75% of domestic respondents, compared with about 90% in January, indicated that they had increased such spreads for loans to small firms.

A significant majority of banks reported having charged higher premiums on riskier loans and having increased the costs of credit lines over the survey period.

Large majorities of domestic banks reported a less favorable or more uncertain economic outlook, a worsening of industry-specific problems and a reduced tolerance for risk as important reasons for tightening credit standards and terms on loans.

As for demand, banks continued to see a decline, with about 60% of domestic respondents reporting a further weakening from firms of all sizes over the previous three months, a proportion similar to that reported in the January survey.

Almost all domestic banks that saw weaker demand indicated that a decrease in their customers' needs to finance investment in plant or equipment was an important reason for the change. Substantial majorities of the domestic institutions also pointed to decreases in their customers' needs to finance inventories, accounts receivable, and mergers and acquisitions.

In addition, about 35% of domestic respondents reported that inquiries from potential business borrowers had decreased during the survey period, a percentage similar to that in the January survey.

The survey also included a special question asking banks how they changed the sizes of credit lines for existing customers over the past three months. Roughly 40% noted a decrease in the size of commercial and industrial credit lines.

There was another special question that focused on the outlook for loan quality in 2009. In response, a significant majority of banks reported that credit quality for all types of loans is likely to deteriorate over the year if the economy progresses according to consensus forecasts.

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