Meet the Author

O. Emre Ergungor |

Assistant Vice President and Economist

O. Emre Ergungor

Emre Ergungor is an assistant vice president and economist in the Research Department at the Federal Reserve Bank of Cleveland. He is responsible for the household finance section of the Banking Policy and Analysis Group, which conducts research on regulatory policy and banking issues and provides advice on financial policy formulation. He also oversees the Federal Reserve System’s Muni Financial Monitoring Team (FMT), which monitors municipal bond markets, state and local funding, and public pension funds. Dr. Ergungor specializes in research related to financial intermediation, information economics, housing policy, and credit access in low- to moderate-income households.

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Economic Trends

Business Loan Markets

by O. Emre Ergungor and Cara Stepanczuk

The Federal Reserve Board’s January 2007 survey of senior loan officers (covering the months of November, December, and January), found essentially no change in credit availability for businesses. After three years of easing standards, domestic banks reported that their lending standards for commercial and industrial loans (for borrowers of all sizes) had changed little over the period surveyed. Banks continued to narrow their lending spreads of loan rates over the cost of funds, attributing their decisions to more aggressive competition from other banks and nonbank lenders, and a more favorable economic outlook. By contrast, foreign banks increased the maximum size of credit lines, eased loan covenants, and narrowed spreads of loan rates over their cost of funds. They reported that their decisions were based on increased liquidity of business loans due to a deeper secondary market and increased tolerance for risk.

Demand for commercial and industrial loans has continued to weaken over the past three months, albeit at a slower rate than reported in the October survey. Those who reported weaker demand said decreased financing needs for accounts receivable and competition from other credit sources were responsible, while those who reported stronger demand cited an increase in mergers and acquisitions. The effect of companies’ investment in plants and equipment was mixed, as it was implicated in both increased and decreased loan demand.

Banks' increasing unwillingness to further ease their lending standards and businesses' declining appetite for bank loans have yet to be reflected on bank balance sheets. The $33 billion increase in bank and thrift holdings of business loans in the fourth quarter of 2006 marks the eleventh consecutive quarter of increases in bank and thrift holdings of commercial and industrial loans. The sharp reversal in the trend of quarterly declines in commercial and industrial loan balances on the books of FDIC-insured institutions prior to the second quarter of 2004 is still going strong.

The utilization rate of business loan commitments (drawdowns on prearranged credit lines extended by banks to commercial and industrial borrowers) edged down to 36.1 percent of total commitments, potentially indicating the declining importance of bank credit to commercial borrowers as a result of easier access to capital markets. This is another piece of evidence suggesting that business credit is readily available.