Capital Markets

Banks Tighten the Screws

The latest survey from the Fed shows banks are putting an ever-tighter squeeze on credit lines and loans to companies.
Tim ReasonNovember 3, 2008

In its latest survey of bank loan officers, the Federal Reserve today confirmed what companies and their finance executives have known for some time: Banks are tightening up their lending standards, prices, and terms for companies large and small.

About 95 percent of U.S. banks reported increasing the cost of credit lines to large- and medium-sized firms, while 90 percent reported doing so for smaller firms, according to the October 2008 Senior Loan Officer Opinion Survey on Bank Lending Practices.

Similarly, 85 percent of domestic banks reported tightening lending standards on commercial and industrial loans to large and middle-market firms over the past three months, a substantial increase from the 60 percent that reported doing so in a July survey.

The Fed also reported that “nearly all banks” increased spreads of loan rates over their cost of funds on C&I loans to large and middle-market firms (an increase from about 80 percent in the July survey), while about 95 percent of respondents reported having widened spreads on loans to small firms.

The timing of the Fed’s survey coincided squarely with the financial crisis, which can be said to have begun in earnest on September 15 with the bankruptcy of Lehman Brothers. Banks received the survey two weeks later — on or after October 2 — and their responses were due on October 16.

The number of U.S. banks reporting tighter lending standards also “increased significantly,” the Fed said, while about 70 percent of U.S. branches and agencies of foreign banks also said they had tightened standards on C&I loans in the past three months. The Fed said that “large fractions” of foreign banks responding also reported increasing premiums on riskier loans, increasing the cost of credit lines, and reducing the maximum size of credit lines.

The Fed survey typically includes several special questions. In this case, the Fed asked whether companies themselves were responding to tightening banking conditions by drawing down C&I loans under preexisting commitments. About 40 percent of banks said the dollar amounts drawn down had increased in the past three months, but the results varied by bank size. Nearly 65 percent of large banks reported increases in draw-downs, while just 5 percent of smaller banks reported the same.

Roughly 75 percent of foreign respondents and about 40 percent of domestic respondents noted that a deterioration in their bank’s current or expected capital position had contributed to the move toward more stringent lending policies over the past three months.