Many banks hold ground on lending standards in Q3, Fed survey finds

By Angela McDaniels

Tacoma, Wash., Nov. 7 - Fewer domestic banks eased standards and terms on commercial and industrial loans over the third quarter compared with recent quarters, according to the Federal Reserve Board's October Senior Loan Officer Opinion Survey on Bank Lending Practices.

The Fed received responses from 51 domestic banks and 22 U.S. branches and agencies of foreign banks.

Among the domestic banks, 86.3% of respondents said their standards for large and middle-market firms were basically unchanged in the third quarter, compared with 9.8% which said that their standards eased somewhat and 3.9% who said their standards tightened somewhat.

Large and middle-market firms are defined as those with annual sales of $50 million or more.

A majority of respondents, 80.6%, said the maximum size of credit lines they are willing to approve remains basically unchanged.

The percentage of respondents who said their premiums charged on riskier loans, loan covenants and collateralization requirements were basically unchanged was 80.4%, 80.4% and 96.1%, respectively.

The areas that saw the most change were costs, spreads and use of interest rate floors.

For costs of credit lines, 66.7% of respondents said their terms remain basically unchanged, followed by 23.5% who said their terms eased somewhat and 5.9% who said their terms tightened somewhat.

Nearly half of respondents, 49%, said the spreads of loan rates over their costs of funds eased somewhat in the third quarter, followed by 39.2% who said their spreads were basically unchanged and 7.8% who said they tightened somewhat.

In the third quarter, 60.4% of respondents said their use of interest rate floors remains basically unchanged, 25% said their use eased somewhat and 10.4% said their use eased considerably.

Reasons for changes

Respondents who tightened or eased their credit standards were asked about their reasons for doing so.

According to the survey, 55.6% of these respondents cited a less favorable or more uncertain economic outlook as a very important reason for tightening standards or loan terms, and 55.6% said increased concerns about the effects of legislative changes, supervisory actions or changes in accounting standards was a somewhat important reason.

Fewer domestic banks cited a more favorable or less uncertain economic outlook as a reason for easing compared to the previous survey.

As possible reasons for easing standards or terms, 53.8% said more aggressive competition from other banks or nonbank lenders was a very important reason, and 19.2% cited improvement in their banks' liquidity positive as a somewhat important reason.

Demand

The survey asked whether demand for commercial and industrial loans from large and middle-market firms had changed, apart from normal seasonal variation.

A majority, 52.9%, of respondents said the demand was about the same in the third quarter, 29.5% was it was moderately weaker and 15.7% said it was moderately stronger.

Foreign lending

A set of special questions in the October survey asked respondents about lending to banks based in Europe and their affiliates and subsidiaries and to nonfinancial firms that have operations in the United States and significant exposures to European economies.

The Fed said about half of the domestic bank respondents indicated that they make loans or extend credit lines to European banks or their affiliates or subsidiaries, and about two-thirds of the foreign respondents indicated the same.

Among those domestic and foreign respondents, a large share - about two-thirds - reported having tightened standards on loans to European banks over the third quarter. Many domestic banks indicated that the tightening was considerable, the Fed said.

About three-fifths of the domestic respondents and all foreign respondents indicated that they make loans or extend credit lines to nonfinancial firms that have operations in the United States and significant exposures to European economies.

The Fed said that among those domestic and foreign respondents, a moderate fraction indicated that they had tightened standards on commercial and industrial loans to such firms. These loans reportedly constituted a small portion - less than 5% - of outstanding commercial and industrial loans at a majority of domestic respondents, and greater exposures were reported only by large banks.

Small net fractions of domestic respondents indicated weaker demand for credit from European banks and from nonfinancial firms with significant exposures to European economies, according to the Fed.

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