U.S: More Business Loans Available;Terms Not Cheap

 Karen Mracek

  WASHINGTON (MNI) - When the Fed's Senior Loan Officer Opinion Survey comes out Monday afternoon, take the results with a grain of salt. New research from the San Francisco Federal Reserve Bank released Monday shows terms of business loans might not be as favorable as those represented in the Fed's quarterly survey.

The Fed's survey of loan officers, the latest edition of which is being released Monday at 2 p.m., shows banks have been easing lending terms for commercial and industrial customers in the years since the financial crisis.

"The survey evidence seems straightforward: Businesses should be able to obtain bank credit fairly easily at favorable terms," the San Francisco Fed report said. "This interpretation suggests that the headwinds stemming from credit availability to businesses should now be quite modest."

But while the dollar amount of business lending has passed pre-recession levels, climbing to more than $1.7 trillion in June, new research from the San Francisco Fed shows terms of loans are not necessarily cheap for businesses.

"Business loans may be more available, but they are not offered at terms that are considered cheap," said Simon Kwan, vice president of the San Francisco Fed's economic research department, in research released Monday.

Despite accommodative monetary policy and abundant excess reserves in the banking system, "the spread of the commercial loan interest rates over the target federal funds rate remains above its long-run average," said Kwan in the bank's latest Economic Letter.

The research, which uses loan level data from the Fed's quarterly Survey of Terms of Business Lending, concludes "business loans are not yet cheap relative to banks' funding cost."

According to the loan-level data, "actual loan spreads seem higher than what the survey of loan officers suggests," the report said.

The San Francisco Fed analysis shows that while the spread of the interest rates charged on business loans over the federal funds rate "has been declining, it still remains above the historical average."

From the perspective of business borrowers, the research shows that five years after the financial crisis, "loans look, at best, fairly reasonably priced relative to banks' funding costs."

One caveat to the research, though. While business loans "do not look unusually cheap, compared with the historical average," the report concedes "it is unclear whether the historical average remains the right benchmark, given the structural changes in the banking industry, such as higher capital requirements and regulatory compliance, as well as changes in competition among banks."

Bank lending to businesses plummeted following the financial crisis, with banks tightening "both underwriting standards and lending terms to levels not seen before," the report said. "At the same time, businesses were reluctant to borrow amid anemic sales and an uncertain economic outlook."

The reasons for the decline include "banks' own capital positions, loss overhang, and risk aversion, as well as the very uncertain economic outlook, which could further affect borrowers' creditworthiness," the research shows.

This drop off was particularly damaging to smaller businesses which do not have access to capital markets like larger firms and rely on banks for lending needs.

"In fact, tight credit conditions at banks have been regularly cited by policymakers as a major headwind to the economic recovery, in part contributing to the lackluster growth in the current expansion," Kwan said.