Fed: Banks Easing Standards to Win Business Loans

Responding to increased competition for business loans, many banks are cutting prices, reducing collateral requirements, and accepting riskier borrowers, the Federal Reserve Board said Monday.

Of the 58 large banks surveyed, 40% said they narrowed the spread on their commercial and industrial loans during the past two months. Banks also increased the maximum size of credit lines and reduced loan covenants, the Fed said.

"Those banks that eased pointed to increased competition from other banks and from nonbank lenders as the main reason for the changes," the Fed said in its senior loan officer survey, which is prepared quarterly for the Federal Open Market Committee.

Dorothy M. Horvath, chief credit officer at National City Bank, Columbus, Ohio, said it makes sense for some banks to ease terms on business loans.

"Is it imprudent? You can't make that generalization," she said. "It depends on the risk profile of the lenders' portfolios, their knowledge of the industry they are lending to, and their ability to manage the risk."

One fifth of banks reported a surge in demand for both middle market and small-business loans, which were used primarily to buy new plants and equipment or to finance mergers and acquisitions.

Demand for commercial real estate loans increased at a third of the banks, but only 10% of lenders eased terms.

On the consumer side, the Fed said 25% of banks tightened standards on credit cards and 10% tightened them for installment loans. A year ago, half the banks reported stiffer terms on credit cards and 25% for installment loans.

Still, 10% of the banks said they were more willing to make consumer loans now then in August, when the last survey was conducted.

The Fed also found that 74% of the banks were willing to reduce late fees, lower interest rates, or extend repayment periods for consumers in financial trouble. Only 8% said they were completely unwilling to make concessions.

Forty-four percent of the banks said they were more willing to make concessions now than three years ago. A third of the banks said they restructured between 1% and 3% of their consumer loans, and 56% said they revised less than 1% of these credits.

The 58 domestic banks hold $1.7 trillion of the industry's $4 billion of assets.

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