More Signs Commercial Credit Is Loosening

WASHINGTON — For the second straight quarter a Federal Reserve Board survey suggested that the ultraconservative credit standards and loan terms put in place immediately after the crisis are beginning to thaw — though banks are still very tentative.

The Fed's quarterly review of lending highlighted the commercial and industrial sector as an area showing some promise, and said institutions reporting eased standards and terms are feeling the heat of competition from other banks as well as nonbank lenders.

"Domestic survey respondents reported having eased standards and most terms on C&I loans to firms of all sizes, a move that continues a modest unwinding of the widespread tightening that occurred over the past few years," the central bank said in its second-quarter Senior Loan Officer Opinion Survey on Bank Lending Practices.

Still, the improvement was mild. For example, seven out of 57 survey respondents said they had eased standards "somewhat" on commercial and industrial loans to large and midsize firms, those with annual sales of $50 million or more. Only two respondents reported any tightening, and the rest said there was no change. It was the second straight quarter demonstrating such an easing.

There was even a slight improvement in standards for loans to smaller business borrowers.

Among the lenders surveyed, six of 28 large domestic respondents indicated they had eased standards for such borrowers, the first time since 2006 that banks reported easing their lending standards for the country's smallest firms.

But while there was hope for borrowers of all sizes, there was not the same diversity among the lenders reporting the improvements.

"While the survey suggests that lending conditions are beginning to ease, the improvement to date has been concentrated at large domestic banks," the Fed said in the report.

"Most banks reported that demand for business and consumer loans was about unchanged." (The central bank defined large banks as those with assets of more than $20 billion.)

The review is meant to offer a window into banks' lending practices and insight into the country's economic recovery following the financial crisis. Besides polling domestic banks, the survey also included responses from 23 U.S. branches and agencies of foreign banks.

In addition to loosening standards, there were also signs business borrowers are receiving credit under better terms.

Of seven categories for C&I loan terms included in the survey — including the maximum size of credit terms and the spreads of loan rates — a sample of large domestic banks surveyed said they had eased terms in most categories.

For example, of those polled about the costs for businesses to obtain C&I loans, 45.6% said those costs had "eased somewhat," while only 5.3% had reported any tightening.

Demand for C&I loans from large and midsize firms, as well as small firms, changed little over the most recent quarter. However, the Fed's April loan officer survey had showed firms of all sizes reporting weaker demand.

Those respondents who saw increased demand cited several factors, including receiving customers who left other institutions they found less attractive; business customers facing higher financing needs for their accounts receivables; and firms wanting to invest in their physical plant needs.

C&I lending was not the only sector showing encouraging signs.

Only nine out of 57 institutions said demand for commercial real estate loans was "moderately weaker," while the majority said demand was unchanged.

Over the past few months, banks also reported a spike in demand for prime residential mortgage loans, an improvement from the prior quarter's survey. Of 55 banks surveyed, 19 reported moderately stronger demand, while two reported substantially stronger demand.

Meanwhile, 24.5% of banks polled said they were "somewhat more willing" to make consumer installment loans than they were three months earlier. None said they were less willing.

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