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30607_1970-1974

30607_1970-1974

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Changes in Bank Lending Practices, 1970
Since late 1964, the Federal Reserve System
 
has conducted quarterly surveys to obtain
 
information from large commercial banks
 
concerning changes in their nonprice lending
 
policies and practices and their appraisal of 
 
current and anticipated demand for business
 
loans. The results of these surveys are pub-lished annually in the spring. Summary sta-tistics covering the four surveys in 1970 are
 
included in this article.While monetary policy eased early in
 
1970, loan demand continued fairly strong
 
and participants in the February 15, 1970,
 
survey were still under pressure from the
 
effects of restrictive policies that had been
 
pursued throughout 1969. Bank liquidity
 
positions were quite low, and banks were
 
still relying heavily on funds from nonde-posit sources—such as funds obtained from
 
sales of bankrelated commercial paper and
 
Eurodollar borrowings from foreign
 
branches. In this environment, virtually no
 
participant reported any easing in lending
 
terms and conditions. More than a third
 
raised interest rates further and reinforced
 
compensating balance requirements. Other
 
measures of bank lending conditions re-mained at the restrictive levels recorded in
 
late 1969.Banks began to alter their policies after
 
the February survey, however, when interest
 
rates on shortterm market instruments de-clined and deposit inflows accelerated.
 
Following the raising of ceiling rates on time
 
and savings deposits in late January, banks
 
quickly took advantage of the opportunity
 
to increase the interest rate attractiveness
 
of their claims. With the influx of time de-posits in early spring—particularly con-sumertype accounts—and the fall of short-term rates of interest to near or below the
 
prime rate, banks lowered the rate charged
 
prime commercial customers by
V i
 of a
 
percentage point. In addition, they began to
 
screen loan requests by established, local
 
customers less stringently. Although banks
 
emphasized the rebuilding of depleted li-quidity positions and the reduction of high
 
cost borrowings, the marked change in
 
financial conditions was also reflected in a
 
small shift toward increased willingness of 
 
banks to extend consumer instalment and
 
singlefamily mortgage loans.Late in June, financial markets came un-der severe pressures in the wake of bank-ruptcy proceedings by a major railroad. The
 
Board of Governors of the Federal Reserve
 
System, among other actions, suspended the
 
ceiling rates on large negotiable certificates
 
of deposit (CD’s) with maturities of 30 to
 
89 days. Thus, banks were enabled to obtain
 
funds in the market and could accommodate
 
creditworthy borrowers who were unable to
 
replace maturing commercial paper—the
 
market most affected by investor reactions
 
to the bankruptcy. Banks attracted a sub-stantial volume of shortterm CD’s and, at
 
the same time, extended loans to finance
 
companies and to other borrowers adversely
 
affected by the unsettled nature of the paper
 
market.Participants in the August 15 survey in-dicated that loan demand had picked up
 
during the preceding 3 months. However,
 
the temporary surge in loan demands around
 
midyear no doubt masked the underlying
298
 
April 1971
 
weakness in economic activity and associ-ated credit demands. Sizable minorities of 
 
banks reported that they had firmed their
 
policies since the preceding survey in several
 
areas, particularly with respect to interest
 
rates, compensating balances, and standards
 
of creditworthiness. Several banks also be-came more reluctant to make loans to brok-ers or term loans to businesses. On the other
 
hand, the trend toward increased willingness
 
to make mortgage loans, which had ap-peared in the previous survey, continued.Despite reductions in the prime rate in
 
September and early November totaling %
 
of a percentage point, threefifths of the re-spondents in the November 15 survey had
 
experienced a weakening in loan demand—
 
as the level of business activity slackened,
 
in part reflecting the automobile strike—and
 
a continued shift by businesses of a large por-tion of their financing needs to the capital
 
markets. At the same time, availability of 
 
funds increased further. Consumertype time
 
and savings deposits expanded at a rapid
QUARTERLY SURVEYFEBRUARY 1970
CHANGESINBANKLENDINGPRACTICESATSELECTEDLARGEBANKS:POLICYONFEBRUARY15,1970,COMPAREDWITHPOLICY3MONTHSEARLIERNumberofbanks;figuresinparenthesesindicatepercentagedistributionoftotalbanksreporting
ItemTotalMuchstrongerModeratelystrongerEssentiallyunchangedModeratelyweakerMuchweakerStrength of demand for commercial and in-dustrial loans:1Compared with 3 months earlier...............Anticipated in next 3 months
.....................Loans to nonfinancial businesses:Terms and conditions:Interest rates charged..............................
Compensating or supporting balances.Standards of creditworthiness
...............
Maturity of term loans
...........................
Practice concerning review of credit lines
 
or loan applications:Established customers..............................New customers
..........................................
Local service area customers
.................
Nonlocal service area customers...........Factors relating to applicant:2
 
Value as depositor or source of collat-eral business...........................................Intended use of the loan
.........................
Loans to independent finance companies:3Terms and conditions:Interest rate charged
................................Compensating or supporting balances.
 
Enforcement of balance requirements .
 
Establishing new or larger credit lines.Willingness to make other types of loans:Term loans to businesses............................
Consumer instalment loans
........................
Singlefamily mortgage loans
.....................
Multifamily mortgage loans
.......................
All other mortgage loans
............................Participation loans with correspondentbanks...........................................................Loans to brokers...........................................125 (100.0)
 
125 (100.0)
(
1
.
6
)
12
14(9.6)
(
11
.
2
)
9587(76.0)(69.6)1523
(
12
.
0
)
(18.4)
( .
8
)
( .
 8
)
TotalMuch firmer
 
policyModerately
 
firmer policyEssentiallyunchangedModerately
 
easier policyMuch
 
easier policy125125125125125125125124124125124124124124
(
100
.
 0
)
(
100
.
0
)
(
100
.
0
)(
100
.
 0
)(
100
.
 0
)
 
(
100
.
0
)
(
 100
.
 0
)
(
100
.
0
)
(
100
.
0
)
(
100
.
 0
)
(
100
.
0
)
(
 100
.
 0
)
(
100
.
 0
)(
100
.
 0
)
1
19(6.4)(6.4)
 
(5.6)
 
(4.8)
( .
8
)
(15.2)20 (16.1)13
12
20(10.5)(9.6)(3.2)(4.8)(6.5)(16.1)3640
21
162326
19
19241515
21
30
20
(28.8)(32.0)(16.8)
(
12
.
8
)
(18.4)
(
20
.
8
)
(15.2)
(15.3)(19.4)
(
12
.
0
)
(
12
.
1
)
(16.9)(24.2)(16.1)807797103
100
7810585879810497
86
84(64.0)(61.6)(77.6)(82.4)(80.0)(62.4)(84.0)
(
68
.
6
)
(70.1)(78.4)(83.9)(78.3)(69.3)
 
(67.8)
( .
 8
)
( .
 8
)
(
1
.
6
)
(.
8
)
( .
 8
)
TotalConsiderably
 
less willingModerately
 
less willingEssentiallyunchangedModerately
 
more willingConsiderably
 
more willing125124
122
119
122
123
122
(
100
.
0
)
(
100
.
0
)
(
100
.
0
)
(
100
.
0
)(
100
.
 0
)(
100
.
 0
)
(
100
.
0
)
11
14(6.4)(2.4)
 
(
6
.
6
)
(9.2)
 
(11.5)(3.3)
 
(
6
.
6
)
1920
 
17
 
15
 
15
10
17(15.2)
 
(16.1)(13.9)
 
(
12
.
6
)
(12.3)
(
8
.
1
)
(13.9)98
100
96
 
93
 
9110897(78.4)(80.7)(78.7)
 
(78.2)
 
(74.6)(87.8)(79.5)
( .
 8
)
( .
 8
)
(
1
.
6
)
( .
 8
)
1After allowance for bank’s usual seasonal variation.2 For these factors, firmer means the factors were considered to be
 
more important in making decisions for approving
 credit
 requests,
 
and easier means they were considered to be less important.3 “Independent,” or “noncaptive,” finance companies are finance
 
companies other than those organized by a parent company mainly
 
for the purpose of financing dealer inventory and carrying instalment
 
loans generated through the sale of the parent company’s products.
299
 
April 1971
 
300FEDERALRESERVEBULLETINAPRIL1971
pace in view of the interest rate attractive-ness of these deposits as well as in reflection
 
of the relatively high savings rate and general
 
consumer uncertainty about the economic
 
outlook. Sales of CD’s also were large, al-though less than the volume immediately
 
following the suspension of shortterm CD
 
ceiling rates.While rates on market instruments con-tinued to decline, many banks invested some
 
of their excess funds in the securities market.
 
Short and intermediateterm State and localbonds were the more heavily favored, al-though longerterm securities gained increas-ing popularity in view of the yield advantage
 
on these issues. The imposition of reserve
 
requirements in late September on commer-cial paper issued by bank affiliates precipi-tated large declines in such borrowings.
 
Banks also reduced their highcost borrow-ings from foreign branches.This ready supply of lendable funds,
 
which led to sharply improved liquidity posi-tions at most banks, encouraged an appreci
QUARTERLY SURVEYMAY 1970
CHANGESINBANKLENDINGPRACTICESATSELECTEDLARGEBANKS:POLICYONMAY15,1970,COMPAREDWITHPOLICY3MONTHSEARLIERNumberofbanks;figuresinparenthesesindicatepercentagedistributionoftotalbanksreporting
Item
TotalMuchstrongerModeratelystrongerEssentiallyunchangedModeratelyweakerMuchweakerStrength of demand for commercial and in-dustrial loans:1Compared with 3 months earlier.................Anticipated in next 3 months.......................Loans to nonfinancial businesses:Terms and conditions:Interest rates charged
..............................Compensating or supporting balances.Standards of creditworthiness
...............
Maturity of term loans
...........................
Practice concerning review of credit lines
 
or loan applications:Established customers..............
..............
New customers
..........................................Local service area customers.................
Nonlocal service area customers...........Factors relating to applicant:2Value as depositor or source of collat-eral business
..........................................
Intended use of the loan
.........................
Loans to independent finance companies:3Terms and conditions:Interest rate charged................................Compensating or supporting balances.
 
Enforcement of balance requirements .
 
Establishing new or larger credit lines.Willingness to make other types of loans:Term loans to businesses
............................
Consumer instalment loans
........................Single-family mortgage loans.....................
Multifamily mortgage loans
.......................
All other mortgage loans
............................Participation loans with correspondentbanks...........................................................Loans to brokers..........................................124 (100.0)125 (100.0)3 (2.4)2625
(
21
.
0
)
(20.0)
8189(65.3)(71.2)13 (10.5)
 11
(
8
.
8
)( .
8
)
TotalMuch firmer
 
policyModerately
 
firmer policyEssentiallyunchangedModerately
 
easier policyMuch
 
easier policy125125125125125125125124124125125125125125
(
100
.
0
)
(
100
.
0
)
(
100
.
0
)
(
100
.
 0
)
(
 100
.
 0
)
(100.0)
(
100
.
0
)
(100.0)
(
100
.
0
)
(
100
.
0
)
(
100
.
0
)
(100.0)
(
100
.
0
)(
100
.
0
)
2
34
 
11
(
1
.
6
)
(2.4)(4.0)(3.2)
(
1
.
6
)
(6.4)
(
1
.
6
)
(7.3)(3.2)(4.0)
(
1
.
6
)
(2.4)(3.2)
(
8
 .
 8
)
14
22
21
11
10
23
11
212110
351617
(
11
.
2
)
(17.6)(16.8)
(
8
 .
8
)(8.0)
(18.4)
(
8
.
 8
)
(16.9)(16.9)
(8.0)
(2.4)(4.0)
(
12
.
8
)
(13.6)779899
 
108108851069297
110
95
 
117
 
10596(61.6)(78.4)
 
(79.2)(86.4)(86.4)
(
68
.
0
)
(84.8)(74.2)(78.3)
(
88
.
 0
)
(76.0)
 
(93.6)(84.0)
 
(76.8)32 (25.6)
 
2 (1.6)2 (1.6)5 (4.0)
 
9 (7.2)6 (4.8)
 
2 (1.6)2 (1.6)25 (20.0)
( .
 8
)
TotalConsiderably
 
less willingModerately
 
less willingEssentiallyunchangedModerately
 
more willingConsiderably
 
more willing125124
122
119
122
(
100
.
0
)
(
100
.
0
)(
100
.
0
)(
100
.
0
)(100.0)
(3.2)124 (100.0)
 
123 (100.0)(4.1)(3.4)(2.5)
(
1
.
6
)
(4.9)157
 
5
8
13719
(
12
.
0
)
(5.6)
 
(4.1)(6.7)
 
(10.7)(5.6)(15.4)1031059299
102
11398(82.4)(84.7)(75.4)(83.2)(83.5)(91.2)(79.7)3
 
11
1864(2.4)(8.9)(14.8)(5.0)(3.3)
(
1
.
6
)
( .
 8
)(
1
.
6
)
(1.7)1After allowance for bank’s usual seasonal variation. 3 “Independent,” or “noncaptive,” finance companies are finance2 For these factors, firmer means the factors were considered to be companies other than those organized by a parent company mainly
 
more important in making decisions for approving credit requests, for the purpose of financing dealer inventory and carrying instalment
 
and easier means they were considered to be less important. loans generated through the sale of the parent company’s products.
 
April 1971

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