February 4, 2025 - Yesterday, the Federal Reserve published its January 2025 Senior Loan Officer Opinion Survey (SLOOS) on Bank Lending Practices. Responses were received from 67 domestic banks and 20 U.S. branches and agencies of foreign banks. (While the survey covers commercial and industrial (C&I), consumer and real estate loans, for the purposes of this summary, we will focus on the C&I component.)
Banks reported higher demand for C&I loans for large and middle-market businesses in 4Q24, with no change in demand for loans for small borrowers. A significant share of foreign banks reported stronger demand for C&I loans. Stronger demand was attributed to increased investment in PP&E and financing needs for inventory, A/R and mergers or acquisitions. In 3Q24, by comparison, banks reported weaker loan demand from all C&I borrowers.
Respondents reported tighter lending standards overall for C&I loans in the quarter. Banks indicated mixed changes to loan terms. Specifically, a moderate and modest share of banks charged higher premiums on riskier loans to large and middle-market businesses and to small businesses, respectively, and a modest share of banks more frequently used interest rate floors and required stricter collateral for businesses of all sizes. A modest share of banks reported narrowed interest rate spreads over the cost of funds and reduced costs of credit lines. Other terms were basically unchanged. Foreign banks reported that standards and most terms for C&I loans remained unchanged, although some increased the costs of credit lines.
Banks that reported tightening standards and terms for C&I loans cited a less favorable/more uncertain economic outlook, industry-specific weakness, and a reduced tolerance for risk. Banks that reported easing standards or terms cited more aggressive competition from other lenders and a more favorable/less uncertain economic outlook.
Looking ahead, banks expect C&I lending standards to ease or remain unchanged and demand to increase in 2025, along with improvement in loan quality.
