Fed: Banks tighten terms for C&I loans, expected tightening in future

Chicago, May 4 – Banks mostly tightened their standards and terms for commercial and industrial loans as demand strengthened for those loans in the first quarter of 2020, according to the Federal Reserve Board’s April 2020 Senior Loan Officer Opinion Survey on Bank Lending Practices.

Responses were received from 67 domestic banks and 22 U.S. branches and agencies of foreign banks, according to the results of the loan survey.

Respondent banks received the survey on March 23 and responses were due by April 3.

Additionally, banks tightened standards and reported weaker demand across all three major commercial real estate loan categories – construction and land development loans, nonfarm nonresidential loans, and multifamily loans.

For loans to households, banks reported tightening their standards across all three consumer loan categories – credit card loans, auto loans, and other consumer loan, while moderate fractions of banks tightened their lending standards on most categories of residential real estate loans.

Banks reported stronger demand for all categories of closed-end mortgage loans and weaker demand for all categories of consumer loans.

Many banks also provided written comments about the coronavirus pandemic in addition to answering the standardized survey questions.

In these comments, banks reported that the changes in standards and demand across loan categories reported for the first quarter occurred late in March as the economic outlook shifted when news emerged about the rapid global spread of Covid-19.

Business lending

Banks reported tightening standards for commercial and industrial loans in the first quarter.

At the same time, the majority of banks increased the use of interest rate floors and a significant number of banks tightened all other lending terms across firms of all sizes.

Meanwhile, a majority of foreign banks tightened standards for commercial and industrial loans, and many foreign banks reported having tightened the premiums charged over riskier loans, the costs of credit lines, and the spreads of loan rates over the costs of funds.

Lenders who reported tightening terms cited “a less favorable or more uncertain economic outlook, worsening of industry-specific problems, and reduced tolerance for risk as important reasons for doing so.”

Additionally, a significant number of lenders mentioned as reasons for tightened terms “decreased liquidity in the secondary market for C&I loans; increased concerns about the effects of legislative changes, supervisory actions, or changes in accounting standards; deterioration in the bank’s current or expected capital and liquidity positions.”

Banks also noted that they were focused on existing clients instead of new clients. And, they also reported that they were addressing their client’s liquidity needs for clients who are experiencing strains.

A majority of banks cited an increase in borrowers’ “precautionary demand for cash and liquidity, a decrease in customers’ internally generated funds, and an increase in customers’ accounts receivable financing needs” as reasons for heightened demand in large and middle-market firms.

“Some banks that reported having experienced stronger demand noted that they expect to tighten lending standards on C&I loans in the future,” the survey report also noted.

© 2015 Prospect News.
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