Banks ease terms for C&I loans, see inverted yield curve as bad: Fed

By Susanna Moon

Chicago, Nov. 13 – Banks eased their standards and terms for commercial and industrial loans as demand weakened for those loans in the third quarter of 2018, according to the Federal Reserve Board’s October 2018 Senior Loan Officer Opinion Survey on Bank Lending Practices.

For commercial real estate loans, the banks maintained their standards on most categories while demand weakened, according to the results of the loan survey.

The survey was compiled using responses from 70 domestic banks and 22 U.S. branches and agencies of foreign banks.

The respondent banks received the survey Oct. 1 and responses were due Oct. 12.

For loans to households, banks reported easing their standards on most categories of residential real estate loans while experiencing weaker demand for those loans.

Meanwhile, the banks kept unchanged their standards on auto and credit card loans as demand for those loans stayed unchanged.

As for lending to businesses, a “moderate net fraction” of domestic banks relieved standards on loans to large and middle-market firms, while they left unchanged standards on loans to small firms.

The banks that eased C&I loan terms over the past three months “cited increased competition from other lenders as an important reason” for doing so.

Also, many of them said, “A more favorable or less uncertain economic outlook and an increased tolerance for risk were important reasons for banks’ easing.”

Meantime, a “moderate” number saw weaker demand for C&I loans from firms of all sizes in the third quarter as foreign banks saw demand unchanged.

In terms of the yield curve, the banks said that their lending policies were unaffected by the change in the slope.

Some banks said, however, that they tightened their standards for CRE loans and their price terms for CRE and RRE loans.

In response to a hypothetical moderate inversion of the yield curve over the next year, though, a “significant” share of banks reported that they would tighten their standards or price terms across every major loan category.

Most banks said they would interpret the inversion scenario “as signaling a less favorable or more uncertain economic outlook and as likely being followed by a deterioration in the quality of their existing loan portfolio.”

Also, the banks saw this as a sign that lending would become less profitable and that their risk tolerance would drop.

© 2015 Prospect News.
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