Banks Continue to Ease Lending Standards, Fed Says

 

May 11, 2005--It's starting to look a lot like 1997--as least as far as lending standards are concerned. But that alone will likely not be enough to spur celebration among small business owners, who continue to face a difficult period.

The Federal Reserve Board's April 2005 Senior Loan Officer Opinion Survey, released yesterday, found that over the past three months large banks have continued to ease their lending standards for Commercial and Industrial (C&I) loans. Results were similar for firms with annual sales above and below $50 million.

A special section of questions found that current C&I lending standards are now comparable to those of the 1996-1997 period, with about half of respondents saying standards were very similar to the period. On average, the 54 domestic banks and 19 foreign banking institutions surveyed said that credit lines, costs, spreads of loan rates over bank costs, and premiums on risky loans were all slightly more generous than they were in 1996-1997.

The survey also found that the relaxed terms had more to do with competition from other lenders than with a more favorable economic outlook.

James Ballentine, director for the Center of Housing, Community, and Economic Development at the American Bankers Association (ABA), said that that the results are nevertheless encouraging, pointing to increases in demand for C&I loans.

"What we are seeing is a fight for customers, particularly small business customers," said Ballentine, who said that smaller banks are competing with the larger banks, leading to improved terms.

But not all bankers agree. Patrick Sullivan, president and CEO of Sovereign Bank in Massachusetts does not believe that the survey reflects an improved lending climate.

"[Large banks] have been, in my opinion, overly aggressive," Sullivan said. "With so much money chasing a few deals, it leads to little irrational exuberance."

Regardless, some doubt whether the improved terms will even have much of an impact on the smallest firms. While Bruce Phillips, senior fellow in regulatory studies at the National Federation of Independent Business (NFIB) Research Foundation, conceded that businesses are going through a "soft patch," he added that this has not led to credit problems, as many of the NFIB's member firms have already locked in fixed-rate loans or rely on credit cards.

These small firms often prefer working with community banks -- even when the terms at large banks are slightly better -- said both Sullivan and Phillips.

"It's harder and harder to get to talk to a real person when you are borrowing $50 thousand instead of $1 or $2 million," said Phillips.


Max Chafkin

Senior writer Max Chafkin has profiled companies such as Yelp, Zappos, Twitter, Threadless, and Tesla for the magazine. He lives in Brooklyn, New York.


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