Increased Competition Force Banks to Ease Lending Standards
Those banks that have started easing their commercial lending standards have done so in response to increased competition from other banks and nonbank sources, according to a recent Federal Reserve Board survey.
A small net fraction of banks reported easing their lending standards on commercial and industrial loans to large and medium-sized businesses, marking the first time this has occurred in two consecutive quarters since 2006, data from the Fed's April Senior Loan Officer Opinion Survey on Bank Lending Practices showed.
Domestic banks that eased their C&I lending standards pointed to increased competition from other banks or nonbank sources of credit as an important factor in their decision. According to the survey, the three factors that exerted the greatest influence on banks' C&I lending policies over the past three months were competitive pressures, the economic outlook, and tolerance for risk in the C&I loan market.
The survey also revealed that demand for C&I loans from large, middle-market and small firms weakened further over the past three months. Among the domestic banks that reported increased demand for C&I loans, the most commonly cited reasons were increased needs to finance inventories and accounts receivable and a pickup in mergers and acquisitions. About half of those banks also reported having seen a shift of demand to their bank from other sources of external finance.