But the downgradings and unexpected shocks affecting large, investment-grade corporations have led creditors to rethink the relative risks of lending to large and small firms. Banks have continued to tighten standards and terms on loans and credit lines this year. Most of the banks that had tightened continued to cite a more uncertain economic environment, a worsening of industry-specific problems, and a reduced tolerance for risk. In their latest reports, bank loan officers also indicated that the demand for business credit has waned of late, largely owing to reductions in planned investments and diminished financing for mergers. Just as lenders are treading more cautiously as the economy slows, so too are borrowers.
Caution is apparent even among small businesses.
The small businesses who thought it was a bad time to expand cited unfavorable economic prospects and a poor outlook for sales. Indeed, the recent NFIB surveys suggest that most of the respondents have not found financing conditions to be particularly onerous to date, despite the more cautious posture of financial institutions and higher risk spreads. For creditworthy businesses, large and small, the cost of borrowing has declined with the easing in monetary policy and the associated decline in lending rates since the fall. The prime lending rate has fallen 2 percentage points since the end of last year, and the average interest rate paid by respondents on the April NFIB survey was down almost 1 percentage point over the same period, to its lowest level in nearly a year. While we may take comfort from the lack of angst expressed by small borrowers in the NFIB surveys, I expect that many risky small businesses have found credit a bit harder or more expensive to obtain.