Friday, September 18, 2009

Bank Loans to Business

Commercial banks are direct competitors with the corporate note and bond markets in making both long-and short-term loans to business. At year-end 1980 total commercial and industrial loans extended by banks reached $330 billion, accounting for 35 percent of all loans granted by commercial banks operating in the United States. Business loans are the single largest asset item at most banks, regardless of their size. Moreover, commercial banks grant their loans to a wide variety of firms covering all major sectors of the business community.
In recent years the Federal Reserve Board as carried out surveys of business lending practices by banks across the United States. The Federal Reserve Survey indicates that bank loans to business firms tend to be short-term or medium-term maturity. For example, short-term commercial and industrial loans averaged just less than four years. Moreover, the short-term loans-which are used principally to purchase inventories, pay wages and salaries, and meet other current expenses-average considerably larger at most banks than long-term business loans, which are taken out mainly to purchase equipment and expand physical facilities.
The Federal Reserve survey suggests that longer-term business loans tend to carry higher average interest rates than shorter-term businesses loans. this is due, in part, to the greater risk associated with long-term credit, Moreover, yield curves have usually sloped upward in recent years, calling for higher average rates on long-term loans. especially interesting is the high proportion of business loans today which carry floating rather than fixed interest rates, the larger and longer-term a business loan is, the more likely its rate will float with market conditions. For example, just 35 percent of the sort-term business loans included in the August 1980 Federal Reserve Survey of U.S. banks carried floating interest rates, while almost twice as many of the long-term business loans-68percent-had floating rates. Clearly, banks become more determined to protect themselves against unexpected inflation and other adverse development through floating interest rates as the maturity and average size of a business loan increases.

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