More aggressive competition from other banks and non-bank lenders is pushing banks to ease lending standards for business loans, according to the Federal Reserve.
The Fed’s October survey of senior loan officers found modest net percentages of banks reported that they eased commercial and industrial loan terms for firms of all sizes over the past three months.
For C&I loans to large and middle-market firms, a significant net percentage of banks reportedly decreased spreads of loan rates over their bank’s cost of funds while moderate net shares of banks reportedly increased the maximum size of their credit lines, lessened their use of interest rate floors, and eased loan covenants.
“Among the domestic respondents that reportedly eased their credit policies on C&I loans over the past three months, more aggressive competition from other bank or non-bank lenders was by far the most emphasized reason for easing,” the Fed said.
“In particular, a majority of banks reported that more aggressive competition was an important reason for easing, with 14 of 29 respondents reporting it as a very important reason, while no other reason queried was cited by more than one bank as being very important,” it added.
A moderate net share of domestic banks reported that demand for C&I loans from large and middle-market firms weakened, while demand from small firms was reportedly unchanged on net.
On the commercial real estate side, banks’ standards on most loan categories remained basically unchanged, while demand for CRE loans reportedly weakened. A significant net fraction of banks reported tightening their standards for loans secured by multifamily residential properties.
Banks also reported that standards for all categories of residential real estate lending either eased or remained basically unchanged over the past three months.
Specifically, a moderate net share of banks reported easing underwriting standards for mortgages that are eligible to be securitized by government sponsored enterprises, while a modest net share of banks reported easing standards for jumbo mortgages that conform to qualified mortgage rules.