Monday, November 30, 2009

Rising Commercial Loan Interest Rate Spreads -- Two Sides of the Coin

The US Federal Funds Rate continues to hover near zero, allowing banks to acquire funds for lending at historically low rates. But banks are spooked by record commercial loan delinquency and charge-off rates and have adjusted their interest rate spreads accordingly. The good news is that after a period of giving away commercial loans, lenders are being rewarded for the risks they take when lending money. The bad news is that commercial borrowers are facing the highest interest rate spreads since 2004. (Click on image to enlarge).

As seen in the accompanying graph, over the past two years interest rate spreads on commercial loans less than $1 million have increased approximately 30%. Throughout the early 2000s, as a result of intense competition from lenders, borrowers enjoyed narrow interest rate spreads on loans greater than $1 million. Those spreads have changed dramatically over the past two years, and spreads on large commercial loans increased almost 90%.

As discussed in my September 23rd blog post, rising interest rate spreads are a component of the continuing trend of tightening lending standards by US banks.

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