WASHINGTON – The Federal Reserve's periodic survey of bank loan officers indicates that a decline in banks' share of commercial and industrial lending activity is likely related to nonbanks' ability to outcompete on both price and loan terms.

In its regular Senior Loan Officer Opinion Survey, the Fed asked respondents a handful of special questions related to C&I lending. The report noted that C&I loan growth among commercial banks had declined from a 9% annual rate in the second quarter to only 3.5% in the third quarter.

"Of the banks that indicated that customer borrowing had shifted from their banks to other bank or nonbank sources because these other sources had become more attractive, most indicated that other commercial banks' and nonbanks' price terms had become more attractive," the survey said. "Most banks also reported nonbanks' non-price terms had become more attractive."

For the purposes of the survey, the Fed specified that "price terms" included factors such as cost of credit line, spreads of loan rates versus cost of funds, premiums for riskier loans and interest rate floors. "Non-price terms" refer to factors like maximum size of credit lines, maximum maturity of credit lines or loans, loan covenants, collateralization requirements, or other terms.

Twenty of the 25 respondents polled indicated that they had eased their C&I lending standards at least in part because of "more aggressive competition from other banks or nonbank lenders." Other factors, such as an increased appetite for risk or more favorable overall economic conditions, were listed as notable factors only by a handful of banks. Most respondents also noted that banks' price and non-price terms were becoming less attractive, and that was at least part of the reason for declining market share.

Seven of 11 respondents indicated that nonbanks – which the survey said include "insurance companies, pension funds, and other nonbank financial institutions" – were beating banks on price terms, while six of those respondents indicated that nonbanks were beating banks on non-price terms. Only four of the 11 respondents said that the corporate bond market was similarly competitive.

A vast majority of bank officers surveyed indicated that they expected the current C&I lending conditions for banks to remain unchanged in the next six months, while a small number believed that conditions might improve somewhat for smaller banks in that same timeframe.

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