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Business Loan Markets

The Federal Reserve Board's April 2008 survey of senior loan officers (covering the months of January through March 2008) found significant tightening of standards for commercial and industrial loans since the last survey. About 55 percent of the domestic banks and 60 percent of the foreign banks surveyed reported having tightened standards for commercial and industrial loans to large and medium-sized firms. The remaining fraction of those surveyed reported little change in lending standards. The reasons cited for tightening included a more-uncertain economic outlook, reduced tolerance for risk, decreased liquidity in the secondary market for these loans, and worsening of industry-specific problems. A large fraction of domestic and foreign banks increased the cost of credit lines and premiums charged on loans to riskier borrowers. A substantial majority of the domestic and foreign banks surveyed raised their lending spreads (loan rates over the cost of funds).

Domestic Banks Reporting Tighter Credit Standards

Demand for commercial and industrial loans continued to weaken over the period surveyed, although by less than in the previous survey period. About 20 percent of the domestic banks and 25 percent of the foreign banks surveyed reported weaker demand. Those who reported weaker demand cited decreased investment in inventories, plants and equipment as a reason, as well as a decrease in customers' need to finance mergers and acquisitions. Those who reported stronger demand said that it was caused by customers who were shifting their borrowing to the banks from other banks or financial firms with less attractive borrowing terms.

Domestic Banks Reporting Stronger Demand

After recording the biggest-ever quarterly increase of $90 billion in third quarter of 2007, bank and thrift holdings of business loans went up moderately by $51 billion in the fourth quarter of 2007. This increase marks the fifteenth consecutive quarterly increase in these holdings. 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 (draw downs on prearranged credit lines extended by banks to commercial and industrial borrowers) jumped up to 37.83 percent of total commitments. The higher demand by borrowers may point to the difficulty in obtaining credit from the capital markets due to the recent financial turmoil.

Utilization Rate of Commercial and Industrial Loan Commitments

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