Capital Markets

Fed: Corporate Demand for Loans Plummets

Bank lending officers cite "decreases in their customers' needs to finance investment in plant and equipment, to finance mergers and acquisitions, ...
David KatzFebruary 2, 2009

Responding to the economic slowdown, finance executives at mid-sized and large U.S. companies are showing a whole lot less interest in borrowing from their banks. In fact, about 60 percent of senior loan officers at domestic banks reported slackening demand for commercial and industrial loans from firms of all sizes as of January, according to the results of a three-month survey by the U.S. Federal Reserve Board.

That compares with about 15 percent of respondents that had reported a drop in loan demand in the Fed’s October survey. About 25 percent of U.S. branches and agencies of foreign banks saw a decrease in demand for C&I loans over the past three months, compared with the 5 percent of respondents in the October survey.

Not unexpectedly, the slackening demand for business loans has to do with the economic slowdown. The senior loan officers of most domestic banks that saw slackening corporate demand for borrowing over the past three months “pointed to decreases in their customers’ needs to finance investment in plant and equipment, to finance mergers and acquisitions, to finance inventories, and to finance customer accounts receivable as reasons for the weaker demand,” the Fed reported in a release issued on Monday.

More than 30 percent of top lending executives at domestic and foreign banks reported that inquiries from potential business borrowers had dropped from November to January, according to the Fed. The survey is based on responses from senior lending officials at 53 domestic banks and 23 U.S. branches and agencies of foreign banks.

At the same time, bank lending continued to tighten—although with much less intensity than it did in the fall. About 65 percent of domestic banks tightened lending standards on commercial and industrial loans to large and middle-market firms over the past three months. That was down from the 85 percent that reported tightening in the October survey but still above previous peaks reported in 1990 and 2001, according to the Fed.

Like corporate borrowers, their lenders attributed the slowdown in bank activity to the bad business outlook. “All domestic and foreign respondents pointed to a less favorable or more uncertain economic outlook as a reason for tightening their lending standards and terms on C&I loans over the past three months,” according to the Fed.

Further, about 90 percent of domestic banks reported that they had boosted the spreads of loan rates over their cost of funds for C&I loansa percentage slightly lower than that recorded in the October survey, which reported that “nearly all banks” widened those spreads.

Interestingly, it wasn’t the banks’ own financial woes that seemed to have fueled the bulk of the tightening. Most of the loan officers said that a worsening of the problems in specific industries and their banks’ curbed risk tolerance were powerful reasons for tightened lending policies. But only about 25 percent of the domestic respondents that tightened lending reported “that a deterioration in their bank’s current or expected capital position had contributed to the change, in comparison with approximately 40 percent in the October survey.”

In another indication of banks’ increasing risk aversion, 80 percent of top loan officers at domestic banks cited an increase at their institutions’ use of interest-rate floors in floating-rate loans to businesses in 2008. None of the domestic bank respondents reported a reduction in the use of interest-rate floors on loans to businesses or households last year. (An interest-rate floor is form of derivative that pays off when interest rates descend below a certain level.)

In other findings, about 60 percent of the loan officers at domestic banks reported a scaling back in the limits on commercial construction lines of credit, and about 50 percent of the banks cut limits on credit lines extended to financial firms.  Roughly 30 percent reported reduced limits on business credit card accounts.