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May 1999

Senior Loan Officer Opinion Survey on
Bank Lending Practices

(Note: Data in the following survey were slightly revised after the May 21 release. Counts for responses to some questions were updated, but the overall conclusions of the survey were not affected. Numbers that changed are noted in bold.)

The May 1999 Senior Loan Officer Opinion Survey on Bank Lending Practices again focused on changes over the past three months in the supply and demand for bank loans to businesses and households. A substantial set of additional questions, some of which were also asked in either the May or November 1998 survey, concerned Year 2000 issues.

In general, the tightening of standards and terms for business loans in evidence since the fall of 1998 has eased considerably. As in the most recent survey, in January, only a few domestic banks, on net, reported having tightened credit standards for commercial and industrial loans. Credit terms, which in recent surveys had been reported tightened, were generally unchanged in May, although risk premiums were again increased. The number of branches and agencies of foreign banks reporting tightened lending standards and terms for commercial and industrial loans was much lower than in recent surveys. Few banks, domestic or foreign, reported increased demand for commercial and industrial loans by large and middle-market firms, but some domestic banks reported increased demand from smaller firms.

Standards were reported to have tightened for commercial real estate loans, but by a smaller fraction of both domestic and foreign banks than in recent surveys; demand for these loans was up at some domestic banks but little changed, on net, at foreign banks.

A number of banks indicated they had tightened credit card lending standards. However, few banks changed credit standards for other consumer loans, or terms on consumer loans of all types. Demand for consumer loans was reported to have increased since the previous survey.

Most domestic and foreign respondents indicated that customer Year 2000 preparedness is part of their loan underwriting, review, and documentation processes. A substantial majority of respondent banks have largely completed Year 2000 preparedness reviews of their material customers, a notable advance from last fall. Most banks reported that only a small portion of those customers they have evaluated were not making satisfactory progress toward Year 2000 preparedness, and relatively few customers have been downgraded because of inadequate Year 2000 preparedness.

Respondents, domestic and foreign, reported little demand to date for special contingency lines of credit related to Year 2000, but many expected demand for such lines to increase somewhat as the year progresses. Almost all domestic respondents, but less than half the foreign ones, reported that they are willing to extend such credit lines, although in some cases with tighter standards or terms. Lines of credit that are up for renewal and will extend beyond year end have been little affected by Year 2000 concerns at domestic banks, but are subject to tighter standards and terms at the branches and agencies of foreign banks.

Lending to Businesses
(Table 1, questions 1-7; Table 2, questions 1-7)

About 10 percent of domestic respondents reported having tightened lending standards for large, middle-market, and small firms over the past three months, a slight uptick from the January survey.1 However, the general tightening of lending terms that had been apparent in recent surveys was absent in May, except for increased premiums on riskier loans, which were reported, on net, by one-fifth of domestic banks. Branches and agencies of foreign banks continued to report tightened credit standards and terms on commercial and industrial loans in larger proportions than domestic banks, but in fewer numbers than in previous surveys. About a quarter of the foreign respondents indicated they had tightened standards; more than 40 percent reported higher charges for credit lines, wider spreads of loan rates over the bank's cost of funds, and increased premiums on riskier loans. Those domestic and foreign banks reporting tighter standards or terms cited as key reasons a reduced tolerance for risk, industry-specific-problems, or a less favorable or more uncertain economic outlook.

Evidence of demand for commercial and industrial loans at domestic banks was mixed: On net, no banks reported a change in demand from large and middle-market firms, whereas approximately 20 percent, on net, reported stronger demand in the January survey; 10 percent, on net, reported increased demand from small firms, about the same as in January. Banks pointed to changes in customers' merger and acquisition financing, plant and equipment purchases, and borrowing from other lending sources as important reasons for changes in loan demand. Branches and agencies of foreign banks characterized loan demand as little changed, on balance.

Credit standards on commercial real estate loans were tightened by 5 percent of domestic respondents, on net, down from 15 percent in the January survey. About 10 percent, on net, reported increased demand for commercial real estate loans, down from 30 percent in January. Only a few branches and agencies reported having tightened standards on commercial real estate loans, and demand for these loans was reported to have been essentially unchanged. In the January survey, more than half of these banks, on net, reported having tightened standards for these loans, while a quarter, on net, reported increased demand.

Lending to Households
(Table 1, questions 8-15)

About 15 percent of banks reported increased willingness to extend consumer installment loans, about the same as in recent surveys. In contrast, standards for credit card loans were tightened by about 13 percent of respondents, somewhat more than in the January survey, and a few banks, on net, also reported having tightened credit standards for consumer loans other than credit card loans, reversing the small net easing reported in the January survey. However, terms for credit card loans, which were tightened by some banks in January, were reported as essentially unchanged in May as were terms of other consumer loans. Demand for consumer loans of all types increased at 17 percent of respondent banks, on net, up from January. Credit standards for home mortgage loans were reported as unchanged, while about 9 percent of respondents, on net, reported increased demand for home mortgages, about the same as in January.

Year 2000
(Table 1, questions 16-33; Table 2, questions 8-25)

Virtually all respondents reported that they include Year 2000 preparedness as part of their underwriting or loan review standards and documentation, and more than a quarter of domestic and a smaller percentage of foreign respondents reported having rejected at least a few loan applications because of inadequate Year 2000 preparedness. The rejection percentage for each banking group was about double that reported in the May 1998 survey.

About 75 percent of domestic respondents and all foreign respondents said they include Year 2000 covenants, conditions, representations, or warranties in loan documentation for at least some loans to customers not already Year 2000 compliant, up from 40 percent (domestic respondents) and 35 percent (foreign respondents) in May 1998.2

Only 7 percent of domestic banks reported that they had evaluated fewer than 75 percent of their material business customers for Year 2000 preparedness, down from 15 percent in November and 88 percent a year ago.3 Just over half of domestic respondents and more than two-thirds of foreign respondents had evaluated 95 percent or more of these customers. Two-thirds of domestic banks, up from one-half in November, reported that fewer than 5 percent of their material customers were making unsatisfactory progress on preparedness, and very few customers have been downgraded for this reason. The foreign responses with respect to customer preparedness were similar.

A subset of the Year 2000 questions addressed the issues of demand for and supply of credit that will extend beyond year-end. Banks reported very little demand to date for new credit lines or extensions of existing credit lines that are specifically related to firms' Year 2000 contingency preparations (Year 2000 contingency lines of credit) but many expect to receive a moderate number of such requests. What demand banks have seen is in large part from other banks. About half of domestic banks were willing to extend Year 2000 contingency lines of credit to both new and existing customers, and all but a few of the remaining respondents were willing to make such lines available to existing customers. By contrast, three-fifths of foreign respondents were unwilling to extend these loans, and none were willing to extend them to new customers.

Those banks expressing reluctance or unwillingness to extend Year 2000 lines of credit listed a variety of reasons, including concerns about the impact of additional lending on capital ratios and concerns about repayment prospects related to Year 2000 effects on customers. About 40 percent of domestic banks and about 55 percent of foreign banks willing to extend Year 2000 contingency lines of credit indicated that these lines will have tighter standards than other credits. Sixty-nine percent of domestic banks willing to extend these loans reported that they would be priced no differently than other loans. Most of the remaining third of respondents expected to charge a premium of 25 basis points or less.

Few domestic respondents expect to impose tighter standards and terms for credit-line renewals that are not specifically meant to meet year-end funding needs but that would extend beyond year-end. Many foreign respondents, by contrast, expect to impose tighter loan standards and terms for such loans, including limited usage around year-end. More than half of the domestic and foreign banks thought that actual usage of existing lines of credit will be stronger than normal around year-end. Banks expected credit demand to be boosted by increased financing needs for inventory or accounts receivable and by market disruptions affecting borrowing elsewhere.

    1. Figures that are net are so reported.
    2. At least part of the increase may be due to more inclusive wording of the question in response to comments from respondents the last time it was used. Specifically, the May 1998 survey only asked about covenants with no mention of conditions, representations, or warranties.
    3. A material business customer is one that represents a material risk as indicated, for example, by the size of the overall relationship with the customer, the customer's risk rating, the complexity of the customer's operating and information technology systems, and the degree of the customer's reliance on these systems.

The report, with charts and tables, is available in
Acrobat (PDF) format. Obtaining the Acrobat Reader

Charts (17 KB PDF)
Measures of lending practices from current and previous surveys
Chart data (ASCII)

Table 1 (31 KB PDF)
Summary of responses from U.S. banks

Table 2 (21 KB PDF)
Summary of responses from branches and agencies of foreign banks

Full report (82 KB PDF)

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Last update: August 27, 1999, 4:00 PM