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James B. Thomson |

Author

James B. Thomson

James Thomson is a former vice president and financial economist in the Research Department of the Federal Reserve Bank of Cleveland. He retired in February 2013.

01.17.07

Economic Trends

Business Loan Markets

James Thomson and Cara Stepanczuk

For most of the past year the survey of senior loan officers showed that credit availability for businesses continued to improve. For the October 2006 survey (covering the months of August, September and October), banks reported that their lending standards were unchanged for commercial and industrial loans for borrowers of all sizes. Survey respondents indicate that they’ve have been narrowing their lending spreads and reducing the cost of credit lines. They attribute their decisions to increased competition (from other banks and as well as other sources of business credit), greater liquidity of business loans resulting from a deeper secondary market, and a reduction in loan defaults.

Respondent Banks Reporting Tighter Credit Standards

Sources: Senior Loan Officer Opinion Survey on Bank Lending Practices, Board of Governors of the Federal Reserve System, October 2006.

The maintenance of lending standards reported in the October survey coupled with some narrowing of credit spreads has come in the face of somewhat weaker loan demand, which resulted largely from businesses’ decreased need for external financing of inventories and accounts receivable.

Respondent Banks Reporting Stronger Demand

Source: Senior Loan Officer Opinion Survey on Bank Lending Practices, Board of Governors of the Federal Reserve System, October 2006.

The continued relaxation of bank lending standards and marginally weaker loan demand reported in the most recent survey has yet to be reflected on bank balance sheets. The $24 billion rise in bank and thrift holdings of business loans in 2006:III marked it as the tenth consecutive quarter of increased bank and thrift holdings of commercial and industrial loans. This recent string of increases represents a strong reversal in the trend of quarterly declines in commercial and industrial loan balances on the books of FDIC-insured institutions before 2005:II.

Quarterly Change in Commercial and Industrial Loans

Sources: Federal Deposit Insurance Corporation, Quarterly Banking Profile, Third Quarter, 2006.

It is interesting that the rise increase in booked credits coincides with a steady rate of utilization rate for business loan commitments (credit lines extended by banks to commercial and industrial borrowers). This is another piece of evidence suggesting that business credit is readily available.

Utilization Rate of Commercial and Industrial Loan Commitments

Sources: Federal Deposit Insurance Corporation, Quarterly Banking Profile, Third Quarter, 2006.