Banks' lending standards continue to tighten, but at slower pace
Tuesday, 10 November 2009

By Matthew Quinn

The Federal Reserve's latest survey of senior loan officers found fewer banks have tightened lending standards on commercial and industrial loans. Just 15 percent reported toughening standards over the three months ended in October, about half the number that reported doing so in July and down from the peak of around 80 percent in October 2008.

Respondents who tightened standards most commonly said it was due to reduced tolerance for risk, followed by a less favorable or more uncertain economic outlook and a worsening of industry-specific problems. Each of the six domestic banks that reported easing loan terms cited more aggressive competition from other lenders as the most important reason for doing so.

But even while credit standards on corporate loans may not be getting significantly tighter, demand remains weak. Roughly 30 percent of U.S. loan officers reported weaker demand for C&I loans from large companies and 35 percent reported softer demand from smaller firms.

Still, that is an improvement from July when about half of all U.S. banks reported weak demand for such loans from companies of all sizes. The predominant reasons given included decreases in the need to finance investment in plant and equipment, inventories, accounts receivable, and merger and acquisition activity.

A separate report released Tuesday by the National Federation of Independent Business supported those claims. It found loan demand among small businesses remains weak "due to widespread postponement of investment in inventories and record low plans for capital spending." Additionally, continued poor earnings and sales performance has weakened the credit worthiness of many potential borrowers. In short, the strongest companies aren't looking to expand and the hardest hit companies can't get access to loans.

The NFIB said the frequency of reported capital outlays over the past six months fell to a record low of 44 percent at surveyed firms. Plans to make capital expenditures over the next few months rose two points from a 35-year record low to 18 percent. Small business owners also said they continued to liquidate inventories and weak sales trends gave them little reason to order new stocks.

The Fed, however, doesn't appear satisfied with weak demand as the explanation for the drop in corporate loans on banks' balance sheets. In the latest loan officer survey, the Fed included a special question about C&I lending, noting that it was "motivated by the significant decline in C&I loans outstanding over the first eight months of 2009."

Among the 57 domestic bank respondents, the two most often cited reasons for the drop were decreased originations of term loans and reduced draws on revolving credit lines. The next most pointed to reason was increased paydowns of draws on revolving credit lines, not including draws taken as precautionary liquidity when credit markets seized up last fall and winter. Less than 10 percent of respondents pointed to increased writedowns and paydowns of precautionary draws as being "very" important reasons for the decline in C&I loans this year.

Among the 23 foreign respondents indicating that C&I lending had declined at their banks this year, about 45 percent reported that decreased originations of term loans was a "very" important reason for the decline. About 15 percent of foreign banks also reported increased writedowns as being "very" important.

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