Magazine article Economic Trends

Business Loan Markets

Magazine article Economic Trends

Business Loan Markets

Article excerpt

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The Federal Reserve Board's January 2008 survey of senior loan officers (covering the months of October 2007 through December 2007) found considerable tightening of credit standards for commercial and industrial loans since the last survey. About one-third of all domestic banks and two-thirds of all foreign banks surveyed reported having tightened standards for these types of loans for small as well as large and medium-sized firms. The remaining fraction of banks reported little change. The reasons cited for tightening included a less favorable economic outlook, a reduced tolerance for risk, and worsening of industry-specific problems. A large fraction of domestic and foreign banks increased the cost of credit lines and the premiums charged on loans to riskier borrowers. About two-fifths of the domestic banks and nearly eight-tenths of the foreign banks surveyed raised lending spreads (loan rates over the cost of funds).

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Demand for commercial and industrial loans continued to weaken over the period surveyed, though the fraction of large domestic banks reporting weaker demand is relatively unchanged from the previous survey. About 35 percent of small domestic banks and 40 percent of foreign banks reported weaker demand, q-hose who reported weaker demand cited decreased investment in inventories, plants and equipment, and a decrease in customers' need to finance mergers and acquisitions as reasons. …

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