outlook survey, september, www. cfosurvey. org. data collection for the 2007 survey of consumer finances was completed early in 2008 and processing of the data is under way. an article reviewing the highlights of the data is expected to be published in the federal reserve bulletin in the first quarter of 2009. release of the public version of the micro data is expected to follow that publication ( see 2007 survey of consumer finances ). see board of governors of the federal reserve system ( 2003 ), survey of small business finances. lenders that make sba loans have not been able to securitize and sell sba - backed loans to other institutions in the secondary market. turning to credit demand, the nfib survey's results are even more pessimistic than they were in april. for example, the survey's index of small business optimism dropped in october to its lowest level since the monthly surveys began in 1986. this subdued level reflects deterioration in several components of the index, including that the fraction of respondents considering expansion in the next three months and the fraction considering capital expenditures in the next three to six months have fallen to the bottom of their ranges over the past two decades. weak plans for business expansion will likely reduce demand for loans, which could result in future declines in small business loans even without any tightening of credit supply conditions. as noted earlier, although only 5 percent of small businesses in the nfib survey ranked financing conditions as their top concern, some 23 percent of firms indicated that sales were their main concern. these results, when combined with the duke / cfo magazine survey data, suggest that consumer demand concerns generally provide the most serious challenges facing small businesses. policy responses to financial and economic developments and their implications for small business credit access i would now like to turn to a discussion of the policy actions that the federal reserve, the congress, the treasury, and other government agencies have taken in recent weeks to address the overall functioning of financial markets and the weakening of economic activity as well as how these policies should assist small businesses going forward. in response to the escalation in financial market stress that began in late september, policymakers both in the united states and other countries have taken a series of extraordinary actions aimed at restoring market functioning and improving investor confidence. the federal reserve has continued to address ongoing problems in interbank funding markets by expanding its existing lending facilities, increasing the quantity of term funds that it auctions to banks, and accommodating greater demand

cost of recent failures reinforces lessons of the past for banks and supervisors, including the need for continuous vigilance against causes of bank failure such as fraud, credit concentrations and rapid entry into new and unfamiliar activities. in addition to these risks, institutions face the challenge of fighting both complacency and competitive pressures with regard to their lending practices. there are some recent indications that the industry is aware of these challenges. the most recent federal reserve senior loan officer opinion survey suggests that banking organizations are becoming more sensitized to risk and are continuing to firm their lending practices. in particular, the percentage of domestic banks tightening standards on commercial and industrial ( c & i ) loans was the largest since the november 1998 survey. in addition, risk premiums on c & i loans have also risen. while firming loan standards and terms is one technique for managing credit risk, sound risk - management systems also involve testing the performance of borrowers under more stressful conditions to reveal weaknesses. when strong conditions largely mask the susceptibility of marginal borrowers, stress testing is invaluable for revealing the magnitude of portfolio risk posed by more challenging economic conditions. other factors that are important for strong asset quality include maintaining adequate pricing amidst fierce competition from other banks and non - banks alike. some organizations are responding to these pressures by moving lower on the credit quality spectrum in a reach for higher nominal yields. in a special question added to the latest lending survey, banks indicated that demand for c & i loans has somewhat strengthened as below - investment - grade borrowers have found unfavorable conditions in the high - yield bond market and have turned to banks as an alternative. the majority of banks reporting additional demand from these borrowers also indicated that they were fairly receptive to these customers. while lending to higher - risk borrowers presents opportunities, banks must ensure that their risk - management systems can properly discern the difference between nominal and risk - adjusted yields, identify credit concentrations, and allocate enough capital and reserves to offset the higher risk of these loans. banks without these safeguards, as well as limits and adequate tracking and reporting to senior management and their boards, have in the past experienced significant problems and sometimes failure. credit quality issues are not the only areas of supervisory focus. the trend of narrowing interest margins at many banks has been coupled with lengthening asset maturities and declining core deposits. the erosion in bank core deposits is to some extent attributable to competitive pressure from the marked