Nov/Dec 2011

Federal Loan Survey — Increased Competition Spurs Continued Easing for C&I Loans

In July 2011, the Federal Reserve Board conducted a Senior Loan Officer Opinion Survey on bank lending practices over the past three months. Lenders from 55 U.S. banks continued to ease lending standards and most terms on all major types of loans other than loans secured by real estate.

The Fed said domestic banks further eased standards on C&I loans to firms of all sizes over the past three months. The Fed noted that as in the past several surveys, the most commonly cited reason for having eased standards or terms on C&I loans was increased competition from other lenders. Modest net fractions of domestic and foreign banks continued to report an increase in demand for C&I loans over the period covered. On balance, domestic banks eased all of the surveyed terms on C&I loans to large and middle-market firms, with the most sizable net fractions of respondents reporting easing of pricing terms, including the spread of loan rates over banks’ cost of funds, the use of interest rate floors and the cost of credit lines. Domestic survey respondents also indicated some easing of loan terms for smaller firms, though the reported easing was less widespread than loans to larger firms.

Exibit #1
Standards for Large & Middle-Market Firms (annual sales of $50 million or more)

Remained Basically Unchanged
Q1 – 83.6%
Q2 – 78.2%
Eased Somewhat
Q1 – 16.4%
Q2 – 21.8%

Standards for Small Firms (annual sales less than $50 million)

Remained Basically Unchanged
Q1 – 86.5%
Q2 – 92.2%
Eased Somewhat
Q1 – 13.5%
Q2 – 7.8%

A larger percentage of all banks eased their standards for large and middle-market firms compared to smaller firms with sales of less than $50 million. Over the past three months, the survey showed that 21.8% eased their standards somewhat for larger firms versus only 7.8% for smaller firms. In the first quarter, the range of difference was less than three percentage points versus 14 percentage points during the most recent three months.

Exhibit #2
Possible Reasons for Easing Credit Standards for Loan Terms
More Aggressive Competition From Other Banks or Non-Bank lenders

Not Important
Q1 – 5.4%
Q2 – 7.5%
Somewhat Important
Q1 – 43.2%
Q2 – 32.5%
Very Important
Q1 – 51.4%
Q2 – 60.0%

More aggressive competition from other banks and non-bank lenders was cited by 37 (92.5%) of the 40 banks that responded to this question as either a very important (60%) or somewhat important (32.5%) reason for easing credit standards and loan terms. Three months earlier, 51.4% and 43.2% said it was very important and somewhat important, respectively.

Exhibit #3
Spread of Loan Rates Over Bank’s Cost of Funds
Standards for Large & Middle-Market Firms (annual sales of $50 million or more)

Remained Basically Unchanged
Q1 – 41.8%
Q2 – 34.5%
Eased Somewhat
Q1 – 56.4%
Q2 – 60.0%

Standards for Small Firms (annual sales of less than $50 million)

Remained Basically Unchanged
Q1 – 46.2%
Q2 – 53.8%
Eased Somewhat
Q1 – 51.9%
Q2 – 44.2%

Banks eased their loan rate spreads over cost of funds more aggressively for larger borrowers as 60% said spreads had eased somewhat versus 44.2% — down from almost 52% in the first quarter — who said they were satisfied with narrower spreads for smaller firms with sales of less than $50 million.

Exhibit #4
How has Demand for C&I Loans Changed Over the Past Three Months
Demand From Large or Middle-Market Firms (annual sales of $50MM or more)

Substantially Stronger
Q1 – 1.8%
Q2- 1.8%
Moderately Stronger
Q1 – 32.7%
Q2 – 27.3%
About the Same
Q1 – 58.2%
Q2 – 61.8%
Moderately Weaker
Q1 – 7.3%
Q2 – 9.1%

Demand for C&I Loans from Small Firms (annual sales of less than $50 million)

Moderately Stronger
Q1 – 21.2%
Q2 – 17.3%
About the Same
Q1 – 67.3%
Q2 – 71.2%
Moderately Weaker
Q1 – 11.5%
Q2 – 9.6%

The Fed noted that a modest net fraction of respondents indicated that loan demand for C&I loans from large and middle-market firms had increased over the past three months, while the net fraction that reported stronger loan demand from smaller firms was close to zero. Most banks that experienced a strengthening of demand cited a shift to bank borrowing from other funding sources as an important reason for the change in demand.

Exhbit #5
If Stronger Loan Demand, Customer Shifted From Other Bank or Non-bank Source Because These Sources Became Less Attractive

Not Important
Q1 – 47.8%
Q2 – 21.1%
Somewhat Important
Q1 – 47.6%
Q2 – 73.7%
Very Important
Q1 – 4.8%
Q2 – 5.3%