Capital Markets

Fed Study: Companies Meet Credit Thaw with Weak Loan Demand

Although fewer bank loan officers are tightening credit, 60% of those working for domestic banks say demand for business credit continues to wane, ...
David KatzMay 5, 2009

In his testimony today before the Joint congressional Economic Committee, Fed chairman Ben Bernanke pointed to a dilemma wrapped among the enigmas of the current weak economy: while some banks are easing up on their corporate-lending reins, companies are getting less eager to take them up on it.

Citing the Fed’s April 2009 Senior Loan Officer Opinion Survey on Bank Lending Practices, Bernanke said that even though the portion of banks tightening their lending policies has recently come down there has been “further weakening of demand for commercial and industrial loans.”

To be sure, many banks are still pulling in the reins on commercial credit. About 40 % of domestic respondents reported that they tightened their credit standards their credit standards on C&I loans to companies of all sizes over the previous three months, according to the survey, which was done between March 31 and April 14 and is based on responses form 53 domestic banks and 23 U.S. branches and agencies of foreign banks.

In the Fed’s January survey of lending officers, however, 65 % said they tightened their lending standards during the prior quarter. “Although 40 % is still very elevated, the April survey marks the first time since January 2008 that the proportion of banks reporting such tightening fell below 50 %,” the Fed said in a press release accompanying the current survey, which was released Monday.

Referring to specific lending terms, about 80 % of domestic banks said that they boosted spreads of loan rates over their cost of funds for C&I loans to large and middle-market firms. That sounds like a lot, but not if you compare it with the 95 % that said they raised the spread in January.

About 75 % of the representatives of domestic respondents said that they had increased those spreads for C&I loans to small firms in April, a clear loosening compared with the approximately 90 % recorded in January. “A significant majority of banks reported having charged higher premiums on riskier loans and having increased the costs of credit lines over the [April] survey period,” the Fed added yesterday.

A starker drop-off in credit tightening occurred at the U.S. branches and agencies of foreign banks. About 30 % of foreign banks reported that they had toughened up on credit for C&I loans in April, compared with 65 % in January.

Yet while a much lower proportion of banks were stiffening credit curbs, “about 60% of domestic banks reported a further weakening of demand for C&I loans from firms of all sizes over the previous three months, a proportion similar to that reported in the January survey,” the Fed reported.  For their part, foreign banks with U.S. arms “saw little change in demand over the survey period, compared with about 25 % that reported weaker demand in the January survey.”

All respondents from non-U.S.-based banks plus 37 of the 38 domestic banks that saw weaker demand for C&I loans attributed a big part of the weakening to a decline in their customers’ plant or equipment financing needs.

“Substantial majorities of the domestic institutions that had experienced such weaker demand also pointed to decreases in their customers’ needs to finance inventories, accounts receivable, and mergers and acquisitions,” according to the Fed.