Senior Loan Officer Opinion Survey on Bank Lending Practices
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The January 2021 Senior Loan Officer Opinion Survey on Bank Lending Practices
The January 2021 Senior Loan Officer Opinion Survey on Bank Lending Practices addressed changes in the standards and terms on, and demand for, bank loans to businesses and households over the past three months, which generally correspond to the fourth quarter of 2020.1
Regarding loans to businesses, respondents to the January survey indicated that, on balance, they tightened their standards on commercial and industrial (C&I) loans to firms of all sizes, with notable differences in reported changes across bank sizes.2 Banks reported weaker demand, on balance, for C&I loans to firms of all sizes. Meanwhile, banks tightened standards across all three major commercial real estate (CRE) loan categories—construction and land development loans, nonfarm nonresidential loans, and multifamily loans—over the fourth quarter of 2020, while reporting weaker demand for most CRE loan categories.
For loans to households, banks left standards unchanged across most categories of residential real estate (RRE), while, on net, they eased standards across all three consumer loan categories—credit card loans, auto loans, and other consumer loans—over the fourth quarter of 2020. Banks reported either somewhat strengthening or unchanged demand for most types of RRE loans. Meanwhile, demand for credit card and other consumer loans remained basically unchanged, and demand for auto loans moderately weakened.
In addition, the survey included a set of special questions inquiring about banks’ expectations for lending standards, loan demand, and loan performance over 2021. Banks, on balance, reported expecting to tighten standards for most business loans, although responses differed across bank sizes, with the largest banks mostly expecting to ease standards. For household loans, banks of all sizes generally expect to ease standards. Banks expect demand to strengthen and loan performance to deteriorate for most loan categories over 2021. One notable exception is C&I loans to large and middle-market firms, for which banks, on net, expect loan performance to improve.
Lending to Businesses
(Table 1, questions 1–12; Table 2, questions 1–8)
Questions on commercial and industrial lending. Over the fourth quarter of 2020, banks reported having tightened standards for C&I loans to firms of all sizes, with notable differences in reported changes across bank sizes. On net, modest shares of large banks reported having eased standards to large and middle-market firms, while modest shares of large banks reported having tightened standards to small firms.3 In contrast, moderate shares of small banks reported having tightened their C&I lending standards to firms of all sizes. At the same time, banks either tightened or left unchanged all lending terms on balance.4 Significant net shares of banks increased the use of interest rate floors for loans to small firms.5 Foreign banks reported having left standards and nearly all lending terms for C&I loans unchanged.6
Major net shares of banks that reported tightening standards or terms cited a less favorable or more uncertain economic outlook, worsening of industry-specific problems, and reduced tolerance for risk as important reasons for doing so.7 Significant net shares of banks also mentioned increased concerns about the effects of legislative changes, supervisory actions, or changes in accounting standards; less aggressive competition from other banks or nonbank lenders; and decreased liquidity in the secondary market for these loans as important reasons for tightening lending standards and terms.
Regarding demand for C&I loans over the fourth quarter, a moderate net share of banks reported weaker demand for C&I loans to firms of all sizes. At the same time, banks reported that the number of inquiries from potential borrowers regarding the availability and terms of new credit lines or increases in existing lines remained basically unchanged over the fourth quarter. Meanwhile, a moderate net fraction of foreign banks reported that both demand for C&I loans and the number of inquiries from potential borrowers strengthened over the fourth quarter.
Major net shares of banks that reported weaker demand cited a decrease in customers’ inventory financing needs, a decrease in customers’ accounts receivable financing needs, a decrease in customers’ investment in plant or equipment, an increase in customers’ internally generated funds, and a decrease in customers’ precautionary demand for cash and liquidity as important reasons for weaker demand. In addition, significant net shares of banks reported a decrease in customers’ merger or acquisition financing needs as an important reason for weaker demand.
Questions on commercial real estate lending. Over the fourth quarter, significant net shares of domestic banks tightened standards for all three CRE loan categories. At the same time, a significant net share of banks reported weaker demand for loans secured by nonfarm nonresidential properties, and a moderate net share of banks reported the same for construction and land development loans. Demand for loans secured by multifamily residential properties was reported to be basically unchanged on net. Similarly, significant net shares of foreign banks tightened standards on CRE loans and reported weaker demand for such loans.
Lending to Households
(Table 1, questions 13–26)
Questions on residential real estate lending. Over the fourth quarter, banks left lending standards unchanged for most mortgage loan categories and for revolving home equity lines of credit (HELOCs), with important differences across bank sizes.8 Modest shares of large banks eased standards for government-sponsored enterprise (GSE)-eligible mortgages—which make up the majority of bank mortgage originations—for qualified mortgage (QM) jumbo loans, and for QM non-jumbo, non-GSE-eligible residential mortgages, while leaving standards unchanged for the remaining categories of RRE loans. At the same time, modest net shares of small banks tightened standards for QM non-jumbo, non-GSE-eligible loans and for non-QM non-jumbo loans, while moderate net shares of small banks tightened standards for subprime mortgages.
Regarding demand for RRE loans, large banks reported unchanged demand across all mortgage categories. In contrast, modest or moderate net shares of small banks reported strengthening demand across most RRE loan categories, except government residential mortgages, for which demand remained reportedly unchanged, and HELOCs and subprime mortgages, for which modest and moderate net shares of small banks, respectively, reported weaker demand.
Questions on consumer lending. Over the fourth quarter, a moderate net share of banks reported easing standards for credit card loans, and modest net shares of banks eased standards for auto loans and for other consumer loans. Consistent with easier lending standards, modest net shares of banks increased credit limits for credit card accounts, and moderate and modest net shares of banks narrowed the rate spreads charged on outstanding balances over their cost of funds for auto loans and for other consumer loans, respectively.9
Regarding demand for consumer loans, a moderate net share of large banks reported stronger demand for credit card and other consumer loans but, at the same time, a modest net share of large banks experienced weaker demand for auto loans. In contrast, modest or moderate net shares of small banks reported weaker demand for all consumer loan categories.
Special Questions on Banks’ Outlook for 2021
(Table 1, questions 27–39; Table 2, questions 9–15)
A set of special questions asked banks about their expectations for lending standards, loan demand, and loan performance as measured by delinquencies and charge-offs over 2021, assuming that economic activity would evolve in line with consensus forecasts. On balance, banks reported expecting tighter standards for most business loans and easier standards for all household loans. Banks reported expecting loan demand to strengthen and loan performance to deteriorate for most loan categories over 2021.
Regarding the outlook for loans to businesses, modest or moderate net shares of banks reportedly expect to tighten standards across most loan categories, except C&I loans to large and middle-market firms, for which banks expect to leave standards unchanged over 2021. However, expectations for standards differ by bank size. Modest or moderate net shares of large banks reportedly expect to ease standards on C&I loans to firms of all sizes and on CRE loans secured by multifamily residential properties. At the same time, large banks anticipate unchanged standards, on net, for the other CRE loan categories. In contrast, significant net shares of small banks expect to tighten standards across most business loan categories, except C&I loans to large and middle-market firms, for which a moderate net share of small banks expect tighter standards over 2021. Meanwhile, significant net shares of banks expect stronger demand across all business loan categories. Additionally, banks expect loan performance to deteriorate for all types of business loans, with the notable exception of C&I loans to large and middle-market firms, for which credit quality is expected to improve over 2021.10
Regarding the outlook for loans to households, a significant net share of banks expect to ease standards for credit card loans, and moderate net shares of banks expect to ease standards for the other types of household loans.11 Meanwhile, the demand outlook for loans to households was mixed across RRE and consumer loans. Modest net shares of banks reported expecting weaker demand for GSE-eligible residential mortgages, whereas for nonconforming jumbo residential mortgage loans banks expect demand to remain unchanged. In contrast, moderate or significant net shares of banks expect stronger demand for consumer loans. In addition, significant net shares of banks reported expecting loan performance to deteriorate for consumer loans across borrower risk categories, and moderate net shares of banks expect performance to worsen for RRE loans and HELOCs.
Banks that reported expecting to change standards for any loan category were additionally asked to assess the importance of several potential reasons for the expected change.12 Major net shares of banks that reported expecting to ease standards cited an expected improvement in credit quality of the loan portfolio and an expected increase in risk tolerance as important reasons for the expected easing in lending standards. In contrast, major net shares of banks that reported expecting to tighten standards pointed to expected deterioration in the quality of their loan portfolios and in collateral values, expected reduction in their risk tolerance and in competition from banks or nonbank lenders, as well as increased concerns about the effects of legislative or regulatory changes as important reasons for the expected tightening in lending standards.
This document was prepared by Michele Cavallo, with the assistance of Elijah Broadbent and Andrew Wei, Division of Monetary Affairs, Board of Governors of the Federal Reserve System.
1 Responses were received from 75 domestic banks and 22 U.S. branches and agencies of foreign banks. Respondent banks received the survey on December 14, 2020, and responses were due by January 4, 2021. Unless otherwise indicated, this summary refers to the responses of domestic banks. Return to text
2 Large and middle-market firms are defined as firms with annual sales of $50 million or more, and small firms are those with annual sales of less than $50 million. Large banks, defined as those with more than $50 billion in assets, eased C&I lending standards to large and middle-market firms in the fourth quarter. Return to text
3 For questions that ask about lending standards or terms, “net fraction” (or “net percentage”) refers to the fraction of banks that reported having tightened (“tightened considerably” or “tightened somewhat”) minus the fraction of banks that reported having eased (“eased considerably” or “eased somewhat”). For questions that ask about loan demand, this term refers to the fraction of banks that reported stronger demand (“substantially stronger” or “moderately stronger”) minus the fraction of banks that reported weaker demand (“substantially weaker” or “moderately weaker”). For this summary, when standards, terms, or demand are said to have “remained basically unchanged,” the net percentage of respondent banks that reported either tightening or easing of standards or terms, or stronger or weaker demand, is greater than or equal to 0 and less than or equal to 5 percent; “modest” refers to net percentages greater than 5 and less than or equal to 10 percent; “moderate” refers to net percentages greater than 10 and less than or equal to 20 percent; “significant” refers to net percentages greater than 20 and less than 50 percent; and “major” refers to net percentages greater than or equal to 50 percent.Return to text
4 Lending standards characterize banks’ policies for approving applications for a certain loan category. Conditional on approving loan applications, lending terms describe banks’ conditions included in loan contracts, such as those listed for C&I loans under question 2 to both domestic and foreign banks and those listed for credit card, auto, and other consumer loans under questions 21–23 to domestic banks. Thus, standards reflect the extensive margin of lending, while terms reflect the intensive margin of lending. The eight lending terms that banks are asked to consider with respect to C&I loans are the maximum size of credit lines, maximum maturity of loans or credit lines, costs of credit lines, spreads of loan rates over the bank’s cost of funds, premiums charged on riskier loans, loan covenants, collateralization requirements, and use of interest rate floors. Return to text
5 Moderate net shares of banks tightened for premiums charged on riskier loans to firms of all sizes. Banks left basically unchanged the maximum size of credit lines for both loans to small firms and loans to large and middle-market firms. Return to text
6 Modest net shares of foreign banks reported having eased the costs of credit lines. Return to text
7 As in previous quarters, banks frequently mentioned COVID-sensitive sectors (restaurants, hotels, retail, entertainment, and energy) in reference to industry-specific problems. Return to text
8 The seven categories of residential home-purchase loans that banks are asked to consider are GSE-eligible, government, QM non-jumbo non-GSE-eligible, QM jumbo, non-QM jumbo, non-QM non-jumbo, and subprime. See the survey results tables that follow this summary for a description of each of these loan categories. The definition of a QM was introduced in the 2013 Mortgage Rules under the Truth in Lending Act (12 CFR Part 1026.32, Regulation Z). The standard for a QM excludes mortgages with loan characteristics such as negative amortization, balloon and interest-only payment schedules, terms exceeding 30 years, alt-A or no documentation, and total points and fees that exceed 3 percent of the loan amount. In addition, a QM requires that the monthly debt-to-income ratio of borrowers not exceed 43 percent. For more on the ability to repay and QM standards under Regulation Z, see the Consumer Financial Protections Bureau (2019), “Ability to Repay and Qualified Mortgage Standards Under the Truth in Lending Act (Regulation Z),” webpage, https://www.consumerfinance.gov/regulations/ability-to-repay-and-qualified-mortgage-standards-under-the-truth-in-lending-act-regulation-z. Return to text
9 Banks were asked about changes in credit limits (credit card accounts and other consumer loans only), maximum maturity (auto loans only), loan rate spreads over costs of funds, the minimum percent of outstanding balances required to be repaid each month, the minimum required credit score, and the extent to which loans are granted to borrowers not meeting credit score criteria. The net shares of banks reporting easing was no more than moderate for any term. Return to text
10 Regarding the performance of business loans, banks were queried about expectations for the performance of four types of C&I loans (non-syndicated loans, syndicated non-leveraged loans, syndicated leveraged loans, and loans to small firms) and three types of CRE loans (multifamily loans, nonfarm nonresidential loans, and construction and land development loans). Return to text
11 Regarding the outlook for RRE loans, banks were asked about their expectations relative to lending standards, demand, and loan performance for GSE-eligible and nonconforming jumbo residential mortgage loans. For the outlook of consumer loans, banks were asked about their expectations relative to lending standards and demand for credit card loans and auto loans. Banks were also asked about their expectations relative to loan performance for consumer loans across prime and nonprime borrowers. In addition, banks were asked about their expectations for the portfolio quality of revolving HELOCs. Return to text
12 Potential reasons for expecting to change standards included changes in (1) capital or liquidity position, (2) collateral values, (3) competition from other bank or nonbank lenders, (4) risk tolerance, (5) ease of selling loans in the secondary market, (6) credit quality of loan portfolio, and (7) concerns about the effects of legislative or regulatory changes. Return to text