The Federal Reserve Board’s Senior Loan Officer Opinion Survey showed that lending standards on commercial and industrial (C&I) loans eased over the first quarter of 2018. At the same time, lending standards on commercial real estate (CRE) loans tightened, but at a slower pace than last quarter. Importantly a net share of banks noted that demand for both C&I and CRE loans weakened over the quarter, despite support from the tax cuts.
However, deeper analysis suggests that weaker demand across C&I and CRE loans may reflect in part a shift in borrowing to other banks and nonbanks. Banks also thought that the use of internally generated funds in the place of C&I loans was also important, while the weakness in demand for CRE loans may also be attributed to a decline in acquisition or development of properties as well as the general level of interest rates. In addition, while the headline results indicate weakening business loan demand, additional quarters of data are needed to establish a trend and a connection.
The April 2018 Senior Loan Officer Opinion Survey on Bank Lending Practices addressed changes in the standards and terms on, and demand for, bank loans to businesses and households over the past three months, which generally corresponds to the first quarter of 2018. On net, lending standards on C&I loans to both large and medium-sized firms as well as small firms eased in the first quarter. The pace of easing at large and medium-sized firms in the first quarter slightly outpaced the extent easing in the fourth quarter of 2017 while standards on C&I loans for small firms neither eased nor tightened on net in the fourth quarter. Net easing represents the difference between the share of banks reporting that standards eased at their bank and the proportion saying that standards tightened.
Although standards eased on net, demand for C&I loans weakened over the quarter. The net weakness in demand followed reports of stronger demand in the fourth quarter of 2017. This result is surprising given the expected impact of the Tax Cuts and Jobs Act on business investment. Previous posts (here, here and here) have linked C&I lending conditions with broader economic performance. However, one quarter is not long enough to draw a conclusion.
Lending standards on CRE loans continued to tighten on net, but the pace of tightening slowed. Meanwhile, demand for CRE loans continues to weaken. However, the weakness of demand for construction and land development loans slowed in the first quarter of 2018 while the extent of demand weakness for multifamily (permanent) loans quickened over the quarter.
The SLOOS also asked survey respondents to provide the level of importance; not important, somewhat important, or very important, to a list of reasons why demand was weaker. A large portion of banks noting weaker demand for C&I loans cited customers were increasing the use of internally generated funds. However, nearly a quarter of banks citing that borrowing had shifted to another bank or nonbank thought this was a ‘very important’ reason. Half of banks noting weaker demand for C&I loans cited declines in customers’ inventory financing needs, their accounts receivable financing needs and their plant or equipment investment. Meanwhile, only 15 percent of banks reporting demand weakness thought that it was because customers’ declining demand for precautionary cash had decreased.
With respect to CRE loans, the greatest number of banks citing weaker demand for these loans thought it was due to the general level of interest rates, which are rising. However, nearly one-fifth of banks banks citing weaker CRE loan demand thought that the decline in the acquisition or development of properties was ‘very important’. More than half of banks citing weaker CRE loan demand thought that a shift in borrowing from their bank to another bank or nonbank was either ‘somewhat important’ or ‘very important’. Fewer than half of banks citing CRE loan weakness thought that it was due to either a decline in the demand for precautionary cash or an increase in internally generated funds.