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Banks (Finance)

Credit Market Impairments: Business Lending Patterns and Concerns

Strategic Insights

— 2 min read

Businesses that rely heavily on credit for operations and growth are struggling to obtain new loans or refinance existing ones due to credit market impairments. Contrary to reports of contraction in commercial and industrial (C&I) loans, data from the Federal Deposit Insurance Corporation (FDIC), Federal Reserve, and Call Report show that the type of commercial credit outstanding has shifted to credit line draw-downs. The demand for C&I loans has decreased significantly, leading to lower loan volumes. Commercial credit-line utilization rates have increased, with a nearly 7% rise since 2007.

Key Takeaways:

  • Commercial and industrial loan volume fell sharply after 2008, but C&I loan volume did not contract by as much as initially thought, as firms shifted to credit line draw-downs.
  • Commercial credit-line utilization rates rose nearly 7% since 2007, indicating that businesses are relying more heavily on existing credit lines.
  • The Senior Loan Officer Opinion Survey by the Federal Reserve shows that fewer banks have tightened credit standards for business loans in the first quarter of 2009 compared to the end of 2008.
  • Demand for business loans has decreased significantly, with 60% of banks reporting weaker demand from firms of all sizes.
  • Loan officers attribute the weaker demand to decreased investment opportunities, inventories, accounts receivable, and mergers and acquisitions.
  • The restrictive credit standards of banks combined with degraded balance sheets of firms may be leading businesses to assume they cannot get credit on favorable terms, reducing demand for new loans.
  • Regional analysis of Fourth District banks shows a return on total assets of 0.19% last quarter, down from 0.78% in the fourth quarter of 2008.
  • Gross returns on commercial loans were identical regionally and nationally at 1.38%.

Statistics:

  • Commercial and Industrial (C&I) loan volume fell by (amount) between mid-2007 and 2008.
  • Commercial credit-line utilization rates increased by nearly 7% since 2007.
  • 40% of banks reported tightening credit standards for business loans in the first quarter of 2009.
  • 80% of domestic banks increased interest rate spreads on loans to medium and large businesses.
  • 60% of bank respondents reported weaker demand for business loans from firms of all sizes.
  • Return on Total Assets (ROA) for Fourth District banks with less than $15 billion in total assets was 0.19% last quarter, down from 0.78% in the fourth quarter of 2008.
  • Gross Returns on Commercial Loans for all banks were 1.38%.

Sources:

  • FDIC
  • Federal Reserve
  • Call Report
  • Senior Loan Officer Opinion Survey
  • Fourth District banks' financial data
  • Federal Reserve's survey of bank lenders

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