Commerical Lending and Bank Portfolios

The major reason that commercial lending is declining in importance as components of bank loan portfolios is that major corporate borrowers that formerly accounted for most of the commercial loan volume of bank loan operations have alternative sources of borrowed funds. The principal alternative source of borrowed funds for major corporate borrowers is commercial paper, an unsecured debt instrument issued directly by corporations. The reliance on commercial paper allows corporate borrowers to avoid tying-up corporate assets as collateral for commercial bank loans, and the use of commercial paper frequently command lower rates of interest than the interests rates associated with commercial bank loans (Saunders & Cornett, 2006).

The major effects on commercial lending by banks of the shift to commercial paper by major corporate borrowers are as follows (Saunders & Cornett, 2006):

An increase in the proportion of loans to smaller companies corresponding with a decrease in the proportion of loan

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Category: Economics - C