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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.

08.06.07

Business Loan Markets

by James Thomson and Cara Stepanczuk

The April 2007 Senior Loan Officer survey (covering the months of February, March, and April) revealed a slight increase in credit availability for businesses. After a slight tightening of standards reported on the previous survey, domestic and foreign banks reported that their lending standards were little changed for commercial and industrial loans for borrowers of all sizes in the last three months. More domestic banks narrowed their lending spreads (loan rates over the cost of funds), attributing their decision to more aggressive competition from other banks and nonbank lenders, and increased liquidity of business loans in the secondary market. Many foreign banks, as well as some domestic banks, also reduced the cost of credit lines and eased loan covenants.

Demand for commercial and industrial loans continued to weaken over the past three months, and at a faster rate, than reported in the January survey. Those institutions that reported weaker demand for commercial and industrial loans cited as motivation a decreased financing need for accounts receivable and competition from other credit sources.

Bank balance sheets have yet to reflect the decline in businesses’ appetite for bank loans in the face of stable credit standards. The $35 billion increase in bank and thrift holdings of business loans in the first quarter of 2006 marks the twelfth consecutive quarter of increase in the 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) held at 36.3 percent of total commitments, potentially indicating the declining importance of bank credit to commercial borrowers as a result of easier access to capital markets. However, this trend could reverse if current problems in housing markets and subprime mortgages spill over into the corporate debt market.