Almost 4 in 10 banks responding to the Federal Reserve Board's senior loan officer survey said they have slashed spreads on loans to large and middle-market corporations.
The trend, reflecting cutthroat competition, extended to small-business loans and lines of credit, with about a quarter of the banks reporting narrower spreads in these areas.
However, for the seventh consecutive quarter, the bankers said they had tightened standards on loans to consumers.
Industry officials said the report, issued by the Fed Friday, contains no red flags.
"This is typical for this point in the expansion," said Christine Chmura, chief economist at Crestar Financial Corp., Richmond, Va. "Growth in consumer loans normally slows, and you get greater competition for business loans."
Kevin M. Blakely, executive vice president for risk management at Cleveland-based KeyCorp, said banks have been forced to cut rates on business loans. "There is a lot of money chasing not enough loans," Mr. Blakely said. "It is not as profitable as we would like, but it is not jeopardizing asset quality."
"There are a lot of banks that are being very aggressive to protect their stream of interest income," agreed Harris S. Berger, senior vice president for risk management at Fleet Corporate Administration, the management company of Fleet Financial Group. "Cutting spreads is a response to competition."
The data come from the Fed's quarterly poll of 54 senior lenders, representing institutions that hold about 40% of the industry's assets.
Fifteen percent of the banks reported increased demand for loans from large and middle-market companies, and 20% saw higher demand from small businesses, the Fed said. Lenders attributed the higher demand to merger financing, new equipment purchases, and inventory buildups.
Banks also were more likely to raise limits on lines of credit, require less collateral, and demand fewer loan covenants.
The Fed said 19% of lenders eased commercial real estate loan standards, the largest change since commercial real estate lending was added to the survey in 1990 and the fourth consecutive increase in the percentage of institutions easing terms.
Conversely, 7.5% of banks surveyed tightened standards on these loans. The rest left them unchanged.
On commercial real estate loans, 40% of the banks lowered spreads while a smaller percentage said they increased the maximum size and maturity of loans. There was no change in required loan-to-value or debt-coverage ratios.
About a quarter of the banks reported tightening standards on credit cards and 10% on other consumer loans. The news wasn't completely gloomy for households: Half as many banks tightened standards on consumer loans in August as in May.
More than 12% of those surveyed said they were more willing to make consumer installment loans, the most since the May 1995 survey. Yet 20% also reported demand for household credit was falling. Demand for mortgage credit rose at 36% of institutions, but fell at 16%.
"This is a positive report for lending," said Frederick Breimyer, chief economist at State Street Bank and Trust Co., Boston. "The problems with consumer lending have been recognized and reduced."
James H. Chessen, chief economist at the American Bankers Association, said he doesn't expect the lower spreads to result in safety or soundness problems. "The risk depends upon the outlook for the economy," he said. "The economy continues to be strong and the outlook is favorable, so banks continue to be very interested in making loans to their corporate customers."
