Senior Loan Officer Opinion Survey on
Bank Lending Practices

The May 2001 Senior Loan Officer Opinion Survey on Bank Lending Practices focused on changes in the supply of and demand for bank loans to businesses and households over the past three months. Supplementary questions on the business side addressed lending and pricing policies for commercial paper backup lines of credit and recent changes in the composition of demand for commercial real estate loans. On the household side, additional questions were included in order to discern changes in terms on mortgage loans to purchase homes over the past year and reasons for changes in lending standards and terms associated with consumer lending. Loan officers from fifty-five large domestic banks and twenty-one U.S. branches and agencies of foreign banks participated in the May survey.

The number of foreign and domestic banking institutions that reported tightening standards and terms on commercial and industrial (C&I) loans over the past three months remained in the elevated range of the last three regular surveys. A significant fraction of domestic respondents also noted that they tightened standards for commercial real estate loans over the same period. In general, both foreign and domestic institutions indicated that the most important reasons for tightening standards and terms on C&I loans were a less favorable or more uncertain economic outlook and a worsening of industry-specific problems. Compared with the January survey, somewhat smaller, though still substantial, net fractions of domestic banks reported weaker demand for both C&I and commercial real estate loans over the past three months.

In view of recent unusual developments in the commercial paper market, a series of special questions addressed lending and pricing policies for commercial paper backup lines of credit at commercial banks. All foreign institutions and a large majority of the domestic commercial banks in the survey indicated that they provided commercial paper backup lines of credit. Citing concerns about the credit quality of commercial paper issuers, significant fractions of both foreign and domestic respondents indicated that they tightened standards and terms on these credit facilities over the past year, particularly for lower-rated (A2/P2) borrowers. Most institutions offering these credit facilities noted that commercial paper backup lines of credit are profitable under current pricing policies, when account is taken of associated business opportunities.

As in the January survey, a number of domestic banks tightened standards and increased spreads on consumer loans over the past three months. The most frequently cited reason for the tightening was a concern about the recent and expected future deterioration in consumer credit quality.

According to the respondents, the demand for consumer loans of all types picked up in the May survey, with a small net fraction of banks reporting increased demand over the past three months, compared to the January survey, when more than one-third of banks noted weaker demand for consumer loans. Almost all domestic banks reported no change in standards for residential mortgage loans. About one-half of respondents noted that demand for residential mortgages had strengthened during the survey period, a marked contrast to the January survey, which indicated no net change in demand for this type of loan.

Lending to Businesses
(Table 1, questions 1-13; Table 2, questions 1-13)

The net percentage of domestic and foreign respondents that tightened standards on C&I loans during the last quarter retreated some from the January peak. Slightly more than one-half of domestic banks reported tightening their standards on business loans to large and middle-market firms over the past three months, compared with 60 percent in January. For small firms, the percentage of banks tightening fell from 45 percent to 36 percent between the two surveys. The fraction of U.S. branches and agencies of foreign banks that reported tightening standards for customers seeking C&I loans also fell in January.

Compared to the January survey, somewhat smaller fractions of domestic banks reported tightening each of the loan terms listed in the survey. More than 60 percent of domestic respondents reported charging higher premiums on riskier loans to large and middle-market firms, down from almost 75 percent in the fourth quarter. Again, no banks reported lowering these premiums, but significantly fewer banks than in January raised them considerably. One-half of the domestic banks, on net, indicated that they had increased the cost of credit lines for large and middle-market firms over the past three months. Almost 40 percent of domestic banks also tightened loan covenants for these borrowers, compared with about 60 percent in the January survey. Somewhat smaller net fractions of domestic banks reported tightening these terms on C&I loans to small firms.

On net, 62 percent of the U.S. branches and agencies of foreign banks reported charging higher premiums on riskier loans over the past three months, about the same as in the January survey. More than 55 percent of foreign institutions, on net, increased the costs associated with credit lines, and 48 percent reported a general strengthening of loan covenants.

Most of the domestic and foreign respondents that had tightened standards or terms on C&I loans over the previous three months cited a less favorable or more uncertain economic outlook, a worsening of industry-specific problems, and a reduced tolerance for risk as reasons for changing their lending policies. About half of domestic banks and more than 80 percent of foreign institutions that had tightened standards and terms on commercial credits also mentioned an increase in defaults by below-investment- grade borrowers as contributing to the firming reported over the survey period. In addition, decreased liquidity in the secondary market for C&I loans continued to be a concern in the May survey.

On net, 40 percent of domestic banks reported weaker demand for C&I loans from large and middle-market firms, and 35 percent, on net, reported decreased demand from small firms over the past three months. Most of the domestic banks that reported weaker loan demand cited a decline in customer demand for credit to finance capital outlays and reduced demand for funds to finance mergers and acquisitions. A decline in internally generated funds was cited as an important reason by seven of the eight domestic respondents that experienced increased C&I loan demand. On net, about 10 percent of foreign branches and agencies saw weaker demand during the survey period. The reasons for reduced C&I loan demand cited by the foreign institutions were largely the same as in the case of domestic banks.

The current survey included a series of special questions that addressed lending and pricing policies for commercial paper backup lines of credit. Forty-four domestic institutions (80 percent of those surveyed) and all of the U.S. branches and agencies of foreign banks answered these questions. More that one-third of both domestic and foreign respondents indicated that they tightened standards on these credit facilities for firms that issued A1/P1-rated commercial paper over the past year. For A2/P2-rated issuers, almost 60 percent of domestic banks and 70 percent of foreign branches and agencies reported firmer standards. Over this period, no institution eased standards on commercial paper backup lines.

In addition to a shift to more stringent credit standards over the past year, large fractions of domestic and foreign respondents also increased the price, reduced the size, and shortened the maturity of committed lines. During that period, 66 percent of domestic banks widened spreads, and almost 60 percent raised commitment fees on these credit facilities for A1/P1-rated issuers. Similarly, more than half of foreign institutions, on net, reported higher spreads and fees for A1/P1-rated borrowers. For lower-rated firms, more than 70 percent of domestic and foreign respondents reported increasing fees and spreads over the past year.

According to the institutions that reported tightening standards or terms on backup facilities over the past year, a heightened concern about a possible deterioration in the credit quality of the issuers was most often cited as a reason for a shift to firmer lending policies. In addition, substantial net fractions of domestic and foreign respondents pointed to an increased likelihood of lines being drawn, because of less certain conditions in the commercial paper market.

Very few institutions reported that commercial paper backup lines of credit made money on a stand-alone basis. However, more than three-quarters of domestic and almost 60 percent of foreign respondents indicated that these credit facilities are profitable after taking account of associated business opportunities. At those institutions that claimed pricing would have to increase from current levels in order to make these lines profitable, fewer than one in five foresaw the resulting drop in volume as likely to be considerable, with the rest expecting minor or moderate declines.

More than 40 percent of domestic banks tightened standards on commercial real estate loans over the past three months, about the same as in the January survey. The fraction of foreign institutions that tightened standards on these loans fell from 30 percent in January to less than 10 percent in the current survey. On net, 22 percent of domestic and 17 percent of foreign respondents noted that demand for these loans weakened in the first quarter. Except for multi-family or apartment homes, domestic banks indicated that demand was weaker, on net, for all major components of commercial real estate, particularly office buildings.

Lending to Households
(Table 1, questions 14-23)

Over the past three months, banks= credit standards for approving residential mortgage loans were largely unchanged. According to the domestic respondents, demand for residential mortgages to purchase homes increased, on net, over the past three months. In the current survey, domestic banks were also queried about changes in terms on mortgage loans to purchase homes over the past year. On net, 16 percent of banks reported increasing the spread of loan rates over their cost of funds during that period. According to the respondents, most non-price terms on residential mortgages were essentially unchanged over that period, except for the maximum size of a mortgage, which increased.

As in the January survey, a number of domestic banks tightened standards and terms for consumer loans. One-fifth of banks reported that they had tightened standards on credit card loans over the past three months, compared with 12 percent in January. In addition, 19 percent of respondents, on net, reduced credit limits on these loans.

For other types of consumer loans, 19 percent of domestic banks, on net, reported tighter standards, and more than one-quarter, on net, increased spreads over their cost of funds, roughly the same net percentages as in the previous survey. The recent run-up, or expected future increases, in consumer delinquency rates were most often cited as a reason for changing consumer-lending policies. On net, 10 percent of domestic institutions reported increased demand over the past three months for consumer loans of all types.

The charts and tables for this report are available in Acrobat (PDF) format. Obtaining the Acrobat Reader

Chart (11.2 KB PDF)
Measures of lending practices from current and previous surveys
Chart data (ASCII)

Table 1 (29.1 KB PDF)
Summary of responses from U.S. banks

Table 2 (17.0 KB PDF)
Summary of responses from branches and agencies of foreign banks

Full report (57.3 KB PDF)