Energy Finance

The U. S. Federal Reserve’s April 2008 Senior Loan Officer Opinion Survey on Bank Lending Practices addressed changes in the supply of, and demand for, bank loans to businesses and households over the past three months.  The survey includes responses from 56 domestic banks and 21 U.S. branches and agencies of foreign banks.

Domestic and foreign institutions reported having further tightened their lending standards and terms on a broad range of loan categories over the past three months. The net fractions of domestic banks reporting tighter lending standards were close to, or above, historical highs for nearly all loan categories in the survey. Compared with the January survey, the net fractions of banks that tightened lending standards increased significantly for consumer and commercial and industrial (C&I) loans. Demand for bank loans from both businesses and households reportedly weakened further, on net, over the past three months, although by less than had been the case over the previous survey period.

Some 55% of domestic banks—up from about 30% in the January survey—reported tightening lending standards on C&I loans to large- and middle-market firms over the past three months. Significant majorities of respondents reported tightening price terms on C&I loans to these firms, and in particular, on net, about 70% of banks—up from about 45% in the January survey—indicated that they had increased spreads of loan rates over their cost of funds. In addition, smaller but significant net fractions of domestic banks reported tightening non-price-related terms on C&I loans to these firms over the past three months.

Regarding C&I loans to small firms, about 50% of domestic respondents reported tightening their lending standards on such loans over the survey period, compared with about 30% who reported doing so in the January survey. On net, about 65% of banks—up from about 40% in the January survey—also noted that they had increased spreads of C&I loan rates over their cost of funds for these firms. In addition, large net fractions of domestic respondents reported tightening other price-related terms, and smaller fractions tightened non-price-related terms on C&I loans to small firms.

About 60% of U.S. branches and agencies of foreign banks—a slightly smaller fraction than in January—noted that they had tightened lending standards on C&I loans over the past three months, and very large majorities also reported that they had tightened price terms on such loans. In particular, around 80% of foreign banks—about the same as in the January survey—reported increasing spreads of loan rates over their cost of funds. Finally, large fractions of foreign respondents reported tightening selected non-price-related terms over the past three months.

Substantial majorities of domestic and foreign respondents pointed to a less favorable or more uncertain economic outlook and to a worsening of industry-specific problems as reasons for tightening their lending standards and terms on C&I loans over the past three months. In addition, significant majorities of respondents cited their banks’ reduced tolerance for risk and decreased liquidity in the secondary market for these loans. About 35% of domestic banks and 45% of foreign institutions—somewhat larger fractions than in the January survey—noted that concerns about their banks’ current or expected capital position had contributed to more-stringent lending policies over the past three months.

On net, about 15% of large domestic banks reported that demand for C&I loans from large and middle-market firms had increased over the past three months, but a similar net fraction of these banks reported weaker demand from small firms. In contrast, about 20%of small domestic banks, on net, reported weaker demand for C&I loans from all types of firms over the past three months. Finally, about 25% of foreign banks, on balance, reported weaker demand for C&I loans over the survey period.

The vast majority of large domestic banks that reported stronger loan demand from large and middle-market firms indicated that customer borrowing shifted to their banks from other bank or nonbank sources, as these other sources became less attractive for such borrowers. Substantial majorities of domestic and foreign institutions that reportedly experienced weaker loan demand over the past three months pointed to a decrease in customers’ needs to finance investment in plant and equipment. In addition, as reasons for a lower demand for C&I loans, the majority of domestic banks indicated that customers’ needs to finance inventories had declined, and all foreign respondents noted a decrease in customers’ needs for merger and acquisition financing. Regarding future business, about 20% of large domestic banks, on net, reported an increase in the number of inquiries from potential business borrowers over the past three months. In contrast, tiny net fractions of small domestic banks and foreign institutions indicated that inquiries from potential business borrowers had declined during the survey period.

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