Meet the Author

Joseph G. Haubrich |

Vice President and Economist

Joseph G. Haubrich

Joseph Haubrich is a vice president and economist at the Federal Reserve Bank of Cleveland, where he is responsible for leading the Research Department's Banking and Financial Institutions Group. He specializes in research related to financial institutions and regulations.

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Meet the Author

Saeed Zaman |


Saeed Zaman

Saeed Zaman is an economist in the Research Department of the Federal Reserve Bank of Cleveland. His current research focuses on inflation measurement and forecasting, including nowcasting methods, and he contributes to the development of macroeconomic forecasting and policy models at the bank. His research interests also include inflation and prices, macroeconomic forecasting, monetary policy, and banking and financial institutions.

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Economic Trends

Business Loan Markets

Joseph G. Haubrich and Saeed Zaman

The Federal Reserve Board’s January 2008 survey of senior loan officers (covering the months of October 2007 through December 2007) found considerable tightening of credit standards for commercial and industrial loans since the last survey. About one-third of all domestic banks and two-thirds of all foreign banks surveyed reported having tightened standards for these types of loans for small as well as large and medium-sized firms. The remaining fraction of banks reported little change. The reasons cited for tightening included a less favorable economic outlook, a reduced tolerance for risk, and worsening of industry-specific problems. A large fraction of domestic and foreign banks increased the cost of credit lines and the premiums charged on loans to riskier borrowers. About two-fifths of the domestic banks and nearly eight-tenths of the foreign banks surveyed raised lending spreads (loan rates over the cost of funds).

Demand for commercial and industrial loans continued to weaken over the period surveyed, though the fraction of large domestic banks reporting weaker demand is relatively unchanged from the previous survey. About 35 percent of small domestic banks and 40 percent of foreign banks reported weaker demand. Those who reported weaker demand cited decreased investment in inventories, plants and equipment, and a decrease in customers’ need to finance mergers and acquisitions as reasons.

Bank balance sheets have yet to reflect the decline in businesses’ appetite for bank loans in the face of tightening credit standards. The $90 billion increase in bank and thrift holdings of business loans in the third quarter of 2007 is one of the biggest quarterly increases ever, and it marks the fourteenth consecutive quarterly 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 (draw downs on prearranged credit lines extended by banks to commercial and industrial borrowers) held at 36.53 percent of total commitments. It held steady despite the fact that recent financial turmoil has made access to capital markets more difficult, which suggests the possibility of lower demand by borrowers.