Senior Loan Officer Opinion Survey: January 2005

January 2005

The January 2005 Senior Loan Officer Opinion Survey
on Bank Lending Practices

The January 2005 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. The survey contained a special question on the reasons why nonbank investors have increased their participation in the commercial and industrial (C&I) loan market recently. In addition, the survey asked banks about changes over the past year in their terms on commercial real estate loans. Finally, banks were asked why the share of industry assets accounted for by residential real estate loans has increased over the past three years. Responses were received from fifty-five domestic banks and twenty foreign institutions.

As was the case throughout 2004, domestic and foreign banks reported in the January 2005 survey that they had eased lending standards and terms for C&I loans and commercial real estate loans. Demand for C&I loans increased, on net, at domestic banks but was unchanged at foreign institutions. Demand for commercial real estate loans rose, on net, at both domestic and foreign banks in recent months. A small number of domestic banks eased standards on residential mortgages over the past three months, while standards and terms for consumer loans were about unchanged, on balance. Relatively large fractions of domestic banks reported weaker demand for both residential mortgages and consumer loans.

C&I Lending
(Table 1, questions 1-7; Table 2, questions 1-7)

In the January survey, domestic banks reported a further net easing of lending standards on C&I loans. One-fourth of domestic banks, on net, reported having eased their standards for large and middle-market firms over the past three months, about the same fraction as in recent surveys. Thirteen percent of domestic respondents also indicated that they had eased their lending standards for small firms, down from nearly 20 percent in the October survey. The share of U.S. branches and agencies of foreign banks that reported easier lending standards for C&I loans was 20 percent, a noticeable decline from the 35 percent net easing in the previous survey.

Both domestic and foreign institutions indicated that they had continued easing lending terms on C&I loans over the past three months. On net, almost 50 percent of domestic banks trimmed spreads of loan rates over their cost of funds for large and middle-market borrowers, about the same fraction as in the previous survey. About one-fourth did so for small firms, down from nearly 40 percent in the October survey. More than half of foreign institutions reported having reduced spreads on their C&I loans in the January survey. In addition, large fractions of domestic and foreign respondents indicated that they had eased other terms by increasing the maximum size of loans, loosening covenant restrictions, or reducing the costs of credit lines. One bank commented that loan maturities had lengthened markedly, a claim consistent with both the Survey of Terms of Business Lending and information from the syndicated loan market.

Almost all domestic and foreign respondents that had eased their lending standards and terms over the past three months cited more aggressive competition from other banks or nonbank lenders as the most important reason. Large fractions of domestic banks also pointed to a more favorable or less uncertain economic outlook and a higher tolerance for risk as reasons for their move toward a less stringent lending posture. More than half of foreign respondents cited increased liquidity in the secondary market for these loans as a reason for easing.

In recent surveys, respondent banks have reported that they had eased standards or terms in response to increased competition from other sources of business credit. This survey included a special question on why nonbank lenders have become more aggressive competitors. The most important reason, according to domestic banks, was that nonbanks have become more attracted to the senior status of loans in bankruptcy and restructuring proceedings. Increased liquidity in the secondary market was the main reason cited by foreign institutions and a close second among the reasons given by domestic banks. Domestic banks also pointed to the trend toward market-based pricing as a reason they considered important.

On net, about 45 percent of domestic institutions reported an increase in demand for C&I loans from large and middle-market firms, up from about 25 percent in the October survey. Almost 30 percent, on net, indicated that demand from small firms had increased, about the same as in the previous survey. In addition, nearly 50 percent of domestic banks, on net, reported an increase in the number of inquiries from potential business borrowers, a larger fraction than in the October survey. In contrast, foreign institutions reported that demand for C&I loans was unchanged over the past three months, although the number of inquiries from potential business borrowers at these institutions rose, on net.

Consistent with the growth of inventories seen late in 2004, greater need for inventory financing was the most-often-cited reason for increased demand for C&I loans at domestic banks. The second most important reason for increased demand noted in the January survey was an increase in merger and acquisition activity. As was the case in previous surveys, large fractions of the respondents experiencing stronger loan demand also pointed to their borrowers= increased financing needs for accounts receivable and for investment in plant and equipment.

Commercial Real Estate Lending
(Table 1, questions 8-11; Table 2, questions 8-11)

About one-fourth of domestic banks reported a net easing of lending standards on commercial real estate loans over the past three months, a slightly larger fraction than in the October survey. The net percentage of domestic banks that reported increased demand for such loans was 16 percent, a modest decline from the 23 percent in the previous survey. Of the thirteen foreign institutions in the survey that are active in the commercial real estate market, one indicated that it had eased standards, and two indicated that demand had increased.

For several years, the January survey has asked banks to report the changes over the past twelve months in various commercial real estate loan terms. Almost half of the domestic and foreign respondents, on net, indicated that they had reduced spreads on loans over the past year, compared with a small fraction that reported having tightened spreads in the January 2004 survey. About 25 percent of domestic banks also indicated that they had increased the maximum size of loan that they were willing to extend last year, a bit more than had done so during 2003. In addition, a modest fraction of domestic banks had eased limits on loan maturity over the past twelve months. By contrast, most foreign institutions reported that they had kept non-price loan terms unchanged, but one indicated that it had tightened several terms considerably. Domestic banks that had eased terms on commercial real estate loans gave reasons very similar to those provided by banks that had eased terms on C&I loans: more competition from other lenders (both bank and nonbank), improved conditions in the commercial real estate market, and a more favorable economic outlook.

Lending to Households
(Table 1, questions 14-19)

A few domestic banks, on net, eased credit standards on residential mortgage loans over the past three months. Nearly 30 percent of banks, on net, reported weaker demand for mortgages to purchase homes, about the same as in the October survey. Nevertheless, over the past three years the share of residential real estate loans in banks' portfolios has risen noticeably. In response to a special question asking for the reasons behind this growth, about 75 percent of the banks noted that the share of new originations that were adjustable-rate loans, which are better suited to holding in banks' portfolios, increased over this period. About two-thirds of the banks said that strong demand for residential mortgages had supported returns on them, thereby making such loans more profitable to hold. Half of the banks indicated that a widening in the spread between yields on residential mortgages and those on mortgage-backed securities had increased the attractiveness of the underlying loans. About one-quarter of the banks said their mortgage holdings had increased because a larger share of their originations did not conform to the standards set by the housing-related government-sponsored enterprises (GSEs). Three-quarters of the banks that had reduced sales of mortgages to GSEs claimed that their capital was sufficient to support that growth, but a few banks reported limiting acquisitions of other assets as a result of the retained mortgages.

Although standards and terms on credit card and other consumer loans were about unchanged, 12 percent of the respondents indicated that their willingness to make consumer installment loans had increased. On net, 27 percent of domestic respondents reported weaker demand for consumer loans in the January survey, about the same as in the previous survey.

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