Credit & Capital

Banks Ease Terms on Business Loans in Q1

A Fed survey finds banks were encouraged to ease terms on C&I loans by "a more favorable or less uncertain economic outlook."
Matthew HellerMay 7, 2019

U.S. banks eased lending terms on commercial and industrial loans to large and middle-market firms in the first quarter while continuing to tighten on commercial real estate loans, according to the Federal Reserve.

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The Fed’s April survey of senior loan officers found a significant net share of banks reported narrowing interest rate spreads on loans to large and middle-market firms, and moderate net shares of banks reported easing loan covenants, increasing the maximum size of loans, and reducing the costs of credit lines to those firms.

Almost all the banks that reported easing terms on C&I loans cited increased competition from other banks or non-bank lenders.

“In addition, significant fractions of banks mentioned a more favorable or less uncertain economic outlook, increased tolerance for risk, and increased liquidity in the secondary market for C&I loans as important reasons for easing,” the Fed added.

According to MarketWatch, the data shows that “despite Federal Reserve moves to raise interest rates over the past few years, credit conditions remain accommodative.”

“Banks are facing a mediocre lending environment. To get new business in the commercial sector, banks are having to ease standards. At the same time, they are not aggressively tightening standards in other sectors, instead taking a wait-and-see approach,” said Scott Anderson, chief economist at Bank of the West.

A moderate net share of banks also reported tightening standards in two commercial real estate loan categories — construction and land development loans in the first quarter — while modest net fractions tightening standards for nonfarm nonresidential loans.

Over the past year, however, moderate net fractions of banks increased the maximum size of loans and the length of the interest-only payment period for loans across all the main CRE loan categories.

“The report appeared to show some rising concerns over the economic outlook despite the many signs of a strong U.S. labor market and healthy economic growth,” Reuters said, citing weaker demand for construction and land development loans.

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