11.13.08
Economic Trends
Business Loan Markets
The Federal Reserve Board’s October 2008 survey of senior loan officers (covering the months of August, September, and October of 2008), found significant tightening of standards for commercial and industrial loans since the last survey. The share of the domestic banks reporting tightening of standards for commercial loans rose to its highest level. About 85 percent of domestic banks (up from 60 percent in last survey) and 70 percent of foreign banks surveyed reported having tightened standards for commercial and industrial loans to large and midsized firms over the past three months. The reasons cited for tightening included the more–uncertain economic outlook, reduced tolerance for risk, and worsening of industry–specific problems. A large fraction of domestic and foreign banks increased the cost of credit lines and premiums charged on loans to riskier borrowers. A substantial majority of the domestic and foreign banks surveyed raised lending spreads (loan rates over the cost of funds).
Demand for commercial and industrial loans has continued to weaken over the period surveyed—although by less than over the previous survey period. About 15 percent of domestic banks reported weaker demand from large and midsized firms, and about 5 percent reported reduced demand by small firms. In contrast, 5 percent on net of foreign banks reported an increase in demand. Those who reported weaker demand said that the reasons were decreased investment in inventories, plants, and equipment, and a decrease in customers’ need to finance mergers and acquisitions and to finance accounts receivables. Those who reported stronger demand cited a shift of customer borrowing from other bank or nonbank sources as these became less attractive for borrowers. Another reason cited was a decrease in their customers’ internally generated funds.
Bank and thrift holdings of business loans went up by only $10 billion in the second quarter of 2008, their smallest quarterly increase since third quarter of 2005. The increase marks the seventeenth consecutive quarterly increase in the bank and thrift holdings of commercial and industrial loans. This trend of quarterly increases in commercial and industrial loan balances on the books of FDIC–insured institutions has been holding up since second quarter of 2004.
The utilization rate of business loan commitments (draw downs on prearranged credit lines extended by banks to commercial and industrial borrowers) jumped up to 39.47 percent of total commitments, about the same rate as it was in the recession of 2001. This high rate can be attributed to the ongoing financial and credit market crisis.
