Business Loan Markets
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.
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.
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.
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.