Senior Loan Officer Opinion Survey on
Bank Lending Practices

The April 2004 Senior Loan Officer Opinion Survey on Bank Lending Practices addressed changes in the supply of, and demand for, bank loans to businesses and households over the past three months.  In addition, the survey contained a series of questions on residential real estate loans and a question on changes in banks' pricing and investment behavior in light of declining net interest margins.  Responses were received from fifty-six domestic and twenty foreign banking institutions. 

Both domestic banks and U.S. branches and agencies of foreign banks indicated that they had eased lending standards and terms for C&I loans over the past three months.  Domestic banks also eased lending standards on commercial real estate loans over the same period, while standards at foreign institutions were little changed.  The share of domestic banks reporting stronger demand for C&I loans in the April survey was notably larger than in the January survey.  Demand for commercial real estate loans at domestic banks also strengthened on net.  By contrast, foreign institutions reported slightly weaker C&I loan demand, on net, and indicated that demand for commercial real estate loans had not changed. 

In the April survey, a small net fraction of domestic banks reported having eased lending standards on residential real estate loans, but standards and terms for consumer loans were generally unchanged.  On net, demand for residential real estate loans was little changed, while demand for consumer loans had strengthened.
 
 

Lending to Businesses

(Table 1, questions 1-8; Table 2, questions 1-8)

Both domestic and foreign banks reported having eased lending standards on C&I loans over the past three months.  Over 20 percent of domestic banks, on net, indicated that they had eased standards for large and middle-market firms, the largest share doing so since the beginning of the 1990s, and a similar fraction noted having eased standards for small firms.  The net share of U.S. branches and agencies of foreign banks that reported having eased lending standards for C&I loans jumped to 30 percent in the April survey, up from 10 percent in the January survey. 

Both domestic and foreign institutions also indicated that they had eased many terms on C&I loans over the past three months.  On net, almost 40 percent of domestic banks reported having narrowed spreads of loan rates over their cost of funds for large and middle-market borrowers in April, up from 27 percent in the previous survey, and 26 percent had done so for small firms.  About 35 percent of foreign institutions indicated that they had reduced spreads on their C&I loans, compared with 14 percent in January.  Survey respondents, on net, continued to report having eased terms on credit lines, both by increasing the maximum size of these lines and by reducing their cost.  Furthermore, about one-fifth of domestic and one-fourth of foreign banks said that they had eased loan covenants over the past three months. 

About 80 percent of the banks that reported having eased standards and terms on C&I loans in the April survey cited more aggressive competition from other banks or nonbank lenders as the most important reason for having done so, roughly the same percentage as in the previous survey.  Domestic banks that had eased standards and terms also pointed to a more favorable economic outlook and improvements in industry-specific problems, as well as an increased tolerance for risk.  The few domestic banks that had tightened standards or terms generally cited a less favorable economic outlook or a reduced tolerance for risk.

C&I loan demand.   On net, 29 percent of domestic banks reported in the April survey that the demand for C&I loans from large and middle-market borrowers had increased, the largest share doing so since 1998.  About 40 percent reported stronger demand from small firms.  Furthermore, about half of domestic respondents noted increased inquiries from potential business borrowers.  Domestic banks that had experienced an increase in demand pointed to greater customer financing needs for inventories and accounts receivable as well as for investment in plant and equipment.  By contrast, foreign banks, on net, reported decreased demand for C&I loans and indicated that customer borrowing had shifted to other banks or nonbank lenders and that customers' internally generated funds had increased. 

Commercial real estate lending.   In the April survey, 11 percent of domestic banks, on net, said that they had eased lending standards on commercial real estate loans, up a bit from the previous survey.  The percentage of domestic banks reporting increased demand for these loans also increased in the current survey, rising to 22 percent, up from 16 percent in January.  At foreign institutions, both commercial real estate lending standards and loan demand were reportedly unchanged on net.
 
 

Lending to Households

(Table 1, questions 9-20)

Demand for residential real estate loans was little changed, on net, over the three months ending in April. Lending standards for residential real estate loans had been eased over the same period by about 8 percent of respondents, on net, up somewhat from the previous survey.    

The April survey asked banks about house price appreciation over the past year in the markets they served.  The responses were fairly diverse: Nearly 30 percent of the respondents indicated that the average rate of increase had been less than 5 percent, around half of them reported a rate between 5 percent and 10 percent, and the rest pointed to home price appreciation of more than 10 percent.  Regarding the future, the banks expected price increases to moderate: Over 60 percent expected home prices to grow less than 5 percent over the next year in the markets they serve, and almost all the rest expected appreciation of 5 percent to 10 percent. 

The current survey also contained several questions about loan-to-value ratios for residential mortgage loans.  Banks reported that about 85 percent of the first-lien mortgages that they originated over the past year had loan-to-value ratios below 90 percent and only 3 percent had ratios of 100 percent or more.  About 80 percent of the volume of second-lien mortgages and home equity loans that respondents had originated over the past year were to customers with a ratio of total mortgage debt to home value below 90 percent.  Only 5 percent were to customers with indebtedness ratios of 100 percent or more.  Banks that had originated loans in areas where home prices had been rising relatively quickly tended to have originated more loans, especially second-lien and home equity loans, with lower loan-to-value ratios than banks that operated in markets with slower appreciation.  Indeed, at banks serving markets in which home prices rose 5 percent or less, 7 percent of second-lien mortgage and home equity loan originations were to borrowers with ratios of total mortgage debt to home value of 100 percent or more and 76 percent of originations were to borrowers with ratios of 90 percent or less.  By comparison, at banks originating loans in areas where homes had appreciated between 10 percent and 20 percent, these shares were 1 percent and 88 percent respectively. 

In April, banks continued to indicate, on net, that they had become more willing to make consumer installment loans, although they reported that lending standards and most lending terms for consumer loans were basically unchanged.  Banks did, however, report having reduced the extent to which consumer loans other than credit card loans were granted to customers who did not meet credit-scoring thresholds.  Of the respondents, 21 percent reported that demand for consumer loans of all types had strengthened over the past three months.  By contrast, in the January survey, 13 percent of respondents, on net, indicated that demand had weakened.
 
 

Net Interest Margins

(Table 1, question 21; Table 2, question 9) 

Special questions in the April survey asked banks how they had changed their investment and pricing behavior in response to the historically low level of short-term interest rates and to resulting pressure on their net interest margins.  On net, domestic banks indicated that these factors had not led them to change their desired levels of either credit risk or interest rate risk.  However, 22 percent of domestic banks, on net, indicated that they had increased fees charged to borrowers and depositors.  About 20 percent of foreign banks, on net, reported that they had taken on more credit risk.
 

This document was prepared by Mark Carlson and Fabio Natalucci with the research assistance of Jason Grimm, Division of Monetary Affairs, Board of Governors of the Federal Reserve System.

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

Charts (13.5 KB PDF)
Measures of lending practices from current and previous surveys
Chart data (ASCII)

Table 1 (26.0 KB PDF)
Summary of responses from U.S. banks 

Table 2 (17.2 KB PDF)
Summary of responses from branches and agencies of foreign banks 

Full report (62.6 KB PDF)

Last update: May 7, 2004 2:00 PM