Heightened competition and demand from borrowers have pushed bankers to cut the price of commercial credit, the Federal Reserve Board said Tuesday.
The central bank said that in its quarterly survey of senior loan officers, "about a third of the respondents, on net, narrowed yield spreads for larger firms, a considerably higher share than in the January survey."
Even small-business borrowers were getting lower interest rates, the Fed survey found. All banks cited shrinking spreads as the No. 1 reason credit terms had changed over the last three months.
"I don't see any firming of price," said Dorothy M. Horvath, executive vice president of credit administration at National City Bank in Columbus, Ohio. "In fact, I see a contraction of prices at the lower end of the middle market."
The one exception, Ms. Horvath said, is syndicated lending, where competition has let up. As foreign banks have pulled back from the market, domestic banks have been able to charge higher rates or fees.
The Fed survey covers the largest banks in each of the 12 Federal Reserve districts. The combined assets of the 57 participating banks total $2 trillion.
In its latest survey, the Fed included a special question asking why lending to real estate investment trusts has skyrocketed over the past year. At the 40 banks answering the question, loans to REITs jumped 76%, to $343 million, in the year ended March 31.
Bankers said REITs are using the credit to purchase commercial properties and finance mergers. A 58% majority of the bankers said they expect lending to REITs to grow slowly over the next year.
A pullback from the REIT market may be wishful thinking, said Allen W. Sanborn, president and chief executive officer of Robert Morris Associates, the credit officer trade group. Mr. Sanborn also wondered when loan terms will finally tighten.
"After five years of easing, why is there any easing going on?" he asked in an interview. "Will it take eight years of easing before it stops?"
In another special question, the Fed asked why banks are holding significantly more securities, especially amid robust loan demand. According to the Fed, securities such as Treasuries or mortgage-backeds held by banks jumped by $50 billion, to $861 billion, during the second half of 1997. The trend continued in the first quarter.
Bankers said they are using excess capital to buy securities in an attempt to boost the bottom line. Bankers also said securities have become an alternative to buying back stock, a move barred for companies involved in pooling-of-interest mergers.
James Chessen, chief economist of the American Bankers Association, said banks may be buying securities rather than making loans as a hedge against bad times. "We're long in the economic cycle and there may be concerns about how quickly the economy may turn," he said.
The Fed also asked the bankers what impact the troubles in East Asia are having on their business. About one out of four said demand for trade financing has been growing, but most said they are now less willing to make such loans.
A final set of special questions focused on the year-2000 problem. Almost eight out of 10 bankers said a customer's readiness for the date change is considered when loans are underwritten or reviewed. However, 43% of the banks have checked only 5% to 25% of their customers for year-2000 computer compliance.
Also, 93% of the bankers said they have rarely or never downgraded an existing loan because the borrower was not ready for 2000, and 91% said they have rarely or never rejected a loan application because a borrower was inadequately prepared.
However, 60% said they are including year-2000 covenants in loan agreements with business borrowers that are not already compliant.
On the consumer side, the survey found few changes in either supply or demand since January. While credit card terms were unchanged, about 10% of the banks said they had cut credit lines on new or existing accounts.