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Fiercer domestic competition is making U.S. banks more flexible on spreads, interest-rate floors, and other costs to borrowers.
Vincent Ryan, CFO Magazine
June 15, 2012
Business lending in the United States may have turned a corner. Domestic banks and U.S. branches and agencies of foreign banks reported easing terms for commercial and industrial (C&I) borrowers in the first quarter of 2012, according to the Federal Reserve's quarterly survey of senior loan officers. The banks also reported that demand for such loans had increased. While they aren't changing their yardstick for who gets credit, many banks are softening loan terms for large and middle-market companies.
About 58% of the 81 financial institutions surveyed said they cut the spread over cost of funds that they charge borrowers, and 32% said they reduced their use of interest-rate floors. About 17% said they lowered the other borrowing costs that come with a line of credit. This is a change from the Fed's January survey, when banks reported that lending standards and terms were static. Standards and terms for small companies, however, remained basically unchanged.
A more positive economic outlook doesn't appear to be driving the changes on C&I terms. Nor did many bank officers cite a higher tolerance for risk or an improvement in their bank's capital position. Instead, almost all domestic U.S. banks said "more-aggressive competition" from other banks and nonbank lenders had forced them to respond with softer terms.
Greater demand for C&I loans carried over from the fourth quarter of 2011. Among the reasons the banks cited for the lift in demand were companies' need to finance accounts receivable, to invest in plants or equipment, and to finance acquisitions. They also attributed the shift in demand to customers switching banks.
The Euro-Zone Effect
The euro-zone crisis continued to affect some kinds of lending. Some U.S. banks reported tightening on loans to financial institutions headquartered in Europe and their affiliates or subsidiaries, as well as to U.S.-based nonfinancial companies that have significant exposure to European economies.
But fewer banks reported doing so than in Q4 2011. The larger effect from the euro-zone crisis, at least currently, is the aggressiveness of overseas banks in pursuing U.S. business customers: two-thirds of domestic U.S. banks that normally go head-to-head with European banks said they saw less competition from them last quarter.
The picture the survey painted for residential real estate lending was murkier. While more banks on net reported increasing residential real estate mortgage assets, "several large banks said that they anticipated reducing their exposures somewhat or substantially," the survey said. Although some banks reported increased demand for residential real estate loans, a majority said they were less willing to originate loans eligible for sale to government-sponsored enterprises.