Fed’s Senior Loan Officer Survey finds easing of many terms in Q1

By Angela McDaniels

Tacoma, Wash., May 8 – Domestic banks reportedly left commercial and industrial lending standards for firms of all sizes basically unchanged over the past three months but eased most terms for large and middle-market firms, according to the Federal Reserve Board’s April 2017 Senior Loan Officer Opinion Survey on Bank Lending Practices.

The survey received responses from 72 domestic banks and 20 U.S. branches and agencies of foreign banks.

A moderate net percentage of domestic banks increased the maximum size of credit lines, reduced the cost of such credit lines, narrowed the spread of loan rates over their cost of funds and eased loan covenants. A modest net share of banks reported increasing the maximum maturity of commercial and industrial loans and reducing the use of interest rate floors. The remaining terms surveyed stayed basically unchanged on net.

The banks also reported easing some of the terms of commercial and industrial loans to small firms. Specifically, a moderate net share of banks narrowed the spread of commercial and industrial loan rates over their cost of funds. Modest net percentages of banks also reported increasing the maximum size of credit lines and maturity of loans and lowering the cost of credit lines, while the remaining terms surveyed remained basically unchanged on net.

Competition cited

According to the survey, major net shares of domestic banks that reported having eased either their standards or terms on commercial and industrial loans over the past three months cited more aggressive competition from other banks or nonbank financial institutions and a more favorable or less uncertain economic outlook as important reasons.

Significant fractions of such banks also cited increased tolerance for risk, an improvement in their current or expected capital positions and improvements in industry-specific problems as important reasons.

A moderate net share of banks reported increased liquidity in the secondary market for these loans as a reason for easing commercial and industrial loan terms and standards, and a modest net share of banks cited reduced concerns about the effects of legislative changes, supervisory actions or changes in accounting standards as reasons for doing so.

Some terms tighten

That said, some domestic banks reportedly tightened either standards or terms on commercial and industrial loans over the past three months, and a major net share of these banks cited as important reasons a less favorable or more uncertain economic outlook, reduced tolerance for risk and increased concerns about the effects of legislative changes, supervisory actions or changes in accounting standards, the Fed said.

According to the survey, several other factors were also cited. Significant net fractions of banks indicated a deterioration in their current or expected capital positions, worsening of industry-specific problems, less aggressive competition from other banks or nonbank financial institutions, decreased liquidity in the secondary market for these loans and deterioration in their current or expected liquidity positions.

Some see weaker demand

Regarding the demand for commercial and industrial loans, the Fed said modest net shares of domestic banks reported weaker demand for commercial and industrial loans from firms of all sizes during the first quarter. Meanwhile, banks reported that inquiries for commercial and industrial lines of credit were basically unchanged.

Major net fractions of banks that reported weaker commercial and industrial loan demand noted the following as important reasons: decreases in customers' investment in plant or equipment and decreases in customers' merger and acquisition financing needs.

In addition, significant net shares of banks cited lower customer inventory and accounts receivable financing needs, lower precautionary demand for cash or liquidity, increases in customers' internally generated funds and a shift in customer borrowing to other banks or nonbank financial institutions as important reasons for weaker commercial and industrial loan demand.

Others see stronger demand

Meanwhile, major net percentages of domestic banks that reported stronger commercial and industrial loan demand cited as important reasons customers' increased need to finance accounts receivable, investment in plant or equipment and merger or acquisition activity, the survey found.

Major net fractions of banks that reported stronger commercial and industrial loan demand also highlighted a shift in customers' borrowing to their bank from other banks or nonbank financial institutions as an important reason.

A significant net share of banks also cited an increase in customers' inventory financing needs as an important reason for stronger commercial and industrial loan demand, and moderate net shares of banks cited a decrease in customers' internally generated funds or an increase in customers' precautionary demand for cash and liquidity.

Foreign banks’ terms mixed

Regarding commercial and industrial lending conditions at foreign banks in the first quarter of 2017, a moderate net share of such banks reported that they tightened standards on commercial and industrial loans.

Foreign banks' changes in terms on commercial and industrial loans were mixed.

On the one hand, a moderate net share reported tightening collateralization requirements, and modest net percentages reported lowering the maximum size and maturity of credit lines and tightening loan covenants on commercial and industrial loans.

On the other hand, significant and moderate net shares of foreign banks reported narrowing spreads of loan rates over their cost of funds and lowering the premium charged on riskier loans, respectively.

Modest net shares of foreign banks reported lowering the cost of credit lines and reducing the use of interest rate floors.

A modest net fraction of foreign banks reported weaker demand for commercial and industrial loans, and the number of inquiries from potential business borrowers regarding lines of credit was basically unchanged.

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