The U.S. economy may be booming, but businesses seem to have had their fill of debt. The October 2018 Senior Loan Officer Opinion Survey on Bank Lending Practices showed on Tuesday that many banks have eased their standards and terms for commercial and industrial (C&I) loans. They are experiencing “weaker demand for such loans on balance,” the Federal Reserve said.
Over the third quarter, a significant number of banks narrowed rate spreads on C&I loans to firms of all sizes. Others eased loan covenants to large and middle-market firms, according to the survey.
At the same time, banks reportedly left their standards unchanged on some categories of commercial real estate (CRE) loans, but tightened for others. A “modest net share” of banks reported tightening their standards on construction and land development loans. Demand for those weakened in the third quarter, as did demand for loans secured by nonfarm nonresidential properties.
Banks also eased standards across many categories of residential real estate, including government-sponsored enterprise (GSE)-eligible and government residential mortgages.
The demand for auto and credit card loans remained unchanged in the third quarter, the Fed said, as did banks’ lending standards on those products.
The Fed asked loan officers a special question about the likelihood of a bank approving credit card and auto loan applications for a certain FICO score in comparison with the beginning of the year.
Banks reported that they were less likely to approve such consumer loans for borrowers with FICO scores of 620 in comparison with the beginning of the year, while they were more likely to approve such consumer loans for borrowers with FICO scores of 720 over the same period.
The Fed also asked banks how their lending policies would potentially change in response to a moderate inversion of the yield curve prevailing over the next year. Significant shares of banks indicated that they would tighten their standards or price terms across every major loan category if the yield curve were to invert.