The Fed said in its July survey that modest fractions of domestic banks, on balance, continued to report having eased their lending standards across most loan types over the second quarter, but a large majority said standards remained “basically unchanged.” While loan demand from large and middle-market firms strengthened somewhat further compared to the first quarter, loan demand from small firms was unchanged.
A large majority of domestic banks that reported stronger demand for C&I loans cited increases in customers’ funding needs related to inventories, accounts receivable, investment in plant or equipment, and mergers and acquisitions as important factors underlying the increase. This year’s survey included a question on competition from European banks. About one-half of domestic banks that compete with European banks reported that business had increased due to decreased competition from such banks.
Exhibit #1:
STANDARDS FOR LARGE, MIDDLE-MARKET & SMALL FIRMS
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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. During the second quarter, the survey showed that 9.5% eased their standards somewhat for larger firms versus 4.9% for smaller firms. In the first quarter, the range of difference was more than five percentage points versus 4.6% during the ensuing quarter.
Overall, the survey showed the overwhelming majority — 90.5% for large and middle-market firms and 95.1% for smaller firms, respectively — said their standards for approving applications for C&I loans “remained basically unchanged” in the second quarter.
Exhibit #2:
POSSIBLE REASONS FOR EASING CREDIT STANDARDS FOR LOAN TERMS, I.E., MORE AGGRESSIVE COMPETITION FROM OTHER BANKS OR NON-BANK LENDERS
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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 “very important” (45.0%) or “somewhat important” (47.5%) reason for easing credit standards and loan terms. Three months earlier, 51.4% and 45.7% said it was “very and somewhat important,” respectively.
Exhibit #3:
SPREAD OF LOAN RATES OVER BANK’S COST OF FUNDS
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During the second quarter, fewer banks said they eased their loan rate spreads over cost of funds for smaller firms with annual sales of less than $50 million compared to the previous quarter. Of the 63 banks that answered this question with regard to large and middle-market companies, on balance, there was little change from the first three months of 2012.
Exhibit #4:
HOW HAS DEMAND FOR C&I LOANS CHANGED OVER THE PAST THREE MONTHS
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A significantly smaller net fraction of banks than in the previous survey reported stronger demand for C&I loans during the second quarter, (i.e., less than 24% indicated that demand for C&I loans by large and middle-market firms was “moderately stronger” compared to over 43% indicated the same in the first quarter.) Similarly, “moderately stronger” C&I loan demand from companies with sales of $50 million or less dropped from about 31% in the first quarter to 18% sequentially. The Fed noted that a decrease in investment in plant or equipment was an important factor for the weaker loan demand in the July survey.
Exhibit #5. (NEW)
New in 2012, the survey included a question regarding competition from European banks with either foreign or domestic customers. About one-half of domestic banks that compete with European banks reported that business had increased due to decreased competition from such banks, (i.e., 64.5% and 48.5% in the Q1 and Q2, respectively, said their business has increased “to some extent” as a result of decreased competition from European banks).
Do not compete with European banks
Q1 – 43.6%
Q2 – 43.5%
Balance of banks that said they do compete with European banks:
Not experienced decrease in competition
Q1 – 9.7%
Q2 – 8.6%
Decreased competition has not appreciably increased business
Q1 – 25.8%
Q2 – 42.9%
Decreased competition has increased business to some extent
Q1 – 64.5%
Q2 – 48.5%