Are banks tiring of commercial borrowers?
The July results of the Federal Reserve’s survey of senior loan officers at banks contained a mild surprise: some banks tightened their standards on commercial and industrial loans in the second quarter of 2016.
According to the Fed, “modest fractions” of the 71 domestic banks surveyed tightened C&I lending standards for large and middle-market firms. Banks didn’t necessarily worsen the terms on loans, however: “a modest percentage” of banks narrowed spreads of loan rates over the cost of funds, while “moderate fractions” of banks increased the premiums charged on riskier loans.
The domestic banks said that they tightened either the standards or terms on C&I loans over the past three months because of a less favorable or more uncertain economic outlook, worsening of borrowers’ industry-specific problems, and reduced tolerance for risk.
At the 23 U.S. branches and agencies of foreign banks, C&I lending standards remained unchanged for the most part. However, a small number of those banks said they raised the cost of credit lines and tightened collateralization requirements, and some said they increased premiums charged on riskier loans.
Commercial real estate (CRE) borrowers also came under pressure in the quarter. Domestic banks generally indicated that their lending standards for CRE loans of all types tightened during the second quarter, according to the Fed survey. In particular, a moderate net fraction of banks reported tightening standards for loans secured by nonfarm nonresidential properties, whereas significant net fractions of banks reported tightening standards for construction and land development loans and loans secured by multifamily residential properties.
Domestic banks, on balance, also said that they had experienced stronger demand for all three kinds of CRE loans during the second quarter. C&I loan demand remained unchanged.
The July senior lending officer survey included a set of special questions that asked respondents to describe the current level of lending standards at their bank. Specifically, for each loan category surveyed, respondents were asked to consider the range over which their bank’s standards have varied between 2005 and the present and then to report where the current level of standards for such loans resides relative to the midpoint of that range.
Domestic banks reported that lending standards on all categories of C&I loans remained at levels that are easier than or near the midpoints of their ranges since 2005, except for syndicated loans to below-investment-grade firms, for which a moderate net fraction of banks reported that standards are currently tighter than the respective midpoints.
Regarding the levels of standards for CRE loans, domestic banks reported that the current levels of standards on all major categories of these loans are tighter than the midpoints of the ranges that have prevailed since 2005.
Meanwhile, in the consumer arena, banks appear to be gaining an appetite for some loan types. During the second quarter, a moderate net fraction of banks reported having eased standards on mortgages they could sell to the government, while a moderate net fraction of banks reported having tightened standards on subprime residential mortgages. For most other residential real estate loans, standards were basically unchanged.
However, a modest net fraction of banks indicated that they were more willing to make consumer installment loans during the second quarter compared with the first. Some reported easing lending standards on credit cards, and a modest net fraction reported tightening lending standards for auto loans. Standards on other consumer loans remained basically unchanged.
Regarding terms on consumer loans, modest net fractions of banks said they widened spreads of interest rates charged on outstanding credit card balances over their cost of funds and reduced minimum required credit scores for credit card loans.
Banks generally reported that demand for consumer loans, as well as residential real estate loans, had strengthened in the second quarter.