Capital Markets

Lenders Are Holding Firm, Says Fed

Banks maintained tough underwriting policies on commercial and industrial loans in the fourth quarter, while tightening terms on credit lines.
Vincent RyanFebruary 1, 2010

Credit remained pricey and loan terms strict at the nation’s commercial banks in the fourth quarter of 2009, as senior bankers reported very little easing of borrowing standards for corporations. That’s according to the Federal Reserve’s latest quarterly survey of senior loan officers, which was released Monday. In a positive sign, on net, considerably fewer banks reported tightening terms on commercial and industrial (C&I) loans than in previous surveys. But some are still turning the screws on small businesses and borrowers seeking lines of credit.

About 95% of banks kept their credit standards for large and midsize businesses (sales of $50 million or more) unchanged last quarter. Terms for lines of credit were stiffer, though: 16% of banks reduced the maximum size, 6% shortened maturities, 22% raised the cost, and 15% tightened covenants.

Some large domestic banks (assets greater than $20 billion) eased some loan standards for large and middle-market borrowers, mostly in the areas of loan maturities and loan spreads. Bank officers that did so cited more-aggressive competition and a more favorable or less uncertain economic outlook as reasons for the change.

Underwriting for small businesses remained slightly tougher, however. About 4% of banks tightened overall lending standards for their smallest commercial customers last quarter, with line-of-credit products for small businesses undergoing change similar to that of lines for large and midsize firms.

The loan officers’ response to a special question on the Fed survey shows banks are worried about the quality of their small-business portfolios. On net, nearly 65% of domestic U.S. banks said the delinquency rate on outstanding loans to small firms was higher than the rate on credits to large and middle-market firms. Bankers in general expect delinquencies and charge-off rates on C&I loans to large and middle-market firms to decline slightly in 2010.

Meanwhile, demand for C&I loans continued to weaken in the fourth quarter. Almost all banks reporting weaker demand said their business customers had less need for financing to invest in plant, equipment, inventory, and accounts receivable. The number of inquiries businesses made regarding new or expanded lines of credit at domestic banks also dropped, but more moderately than in recent periods.

In contrast to C&I borrowers, borrowers seeking loans secured by commercial real estate faced higher hurdles last quarter. Large numbers of domestic U.S. and foreign banks reported tightening a range of terms on commercial real estate loans. For borrowers, spreads of loan rates over banks’ cost of funds, debt-service coverage ratios, and loan-to-value ratios all worsened.