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Business Loan Markets

The Federal Reserve Board's October 2007 survey of senior loan officers (covering the months of August, September and October), found considerable tightening of standards for commercial and industrial loans. About one-fifth of domestic banks and one-third of foreign banks tightened standards for commercial and industrial loans to large and medium size firms, while the remaining fraction reported little change in lending standards in the period surveyed. The reasons cited for tightening included a less favorable economic outlook, a reduced tolerance for risk, and decreased liquidity in the secondary market. A large fraction of domestic and foreign banks increased the cost of credit lines and the premiums charged on loans to riskier borrowers. About a third of the banks surveyed raised lending spreads (loan rates over the cost of funds).

Domestic Banks Reporting Tighter Credit Standards

Demand for commercial and industrial loans has continued to weaken over the period surveyed, though the fraction of banks reporting weaker demand is smaller than the in previous survey. Those who reported weaker demand cited decreased investment in plants and equipment as the reason, while those who reported stronger demand cited difficulty in getting other forms of credit such as commercial paper, and increased activity in mergers and acquisitions.

Domestic Banks reporting Stronger Demand

Bank balance sheets have yet to reflect the decline in businesses' appetite for bank loans in the face of tightening credit standards. The $52 billion increase in bank and thrift holdings of business loans in the second quarter of 2007 marks the thirteenth 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.

Quarterly Change in Commercial and Industrial Loans

The utilization rate of business loan commitments (drawdowns on prearranged credit lines extended by banks to commercial and industrial borrowers) held at 36.05 percent of total commitments. This could indicate the declining importance of bank credit to commercial borrowers as a result of easier access to capital markets, as well as lower demand.

Utilization of Commercial and Industrial Loan Commitments

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