Senior Loan Officer Opinion Survey: April 2005

April 2005

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

The April 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 special questions on the net changes in C&I lending standards and terms since the 1996-97 period and on the reasons for those changes. This article reports the aggregate responses from fifty-four domestic banks and nineteen foreign banking institutions.

As has been the case since the beginning of 2004, notable fractions of banking institutions reported in the latest survey that they had eased lending standards and terms for C&I loans over the past three months. Banks that eased standards or terms once again reported having done so in large part because of increased competition from other sources of business credit. A moderate net fraction of banks also reported having eased lending standards for commercial real estate loans over the past three months. Standards on residential mortgages were about unchanged over the past three months, and a small net fraction of banks had eased standards for consumer loans. On the demand side, domestic and, to a lesser degree, foreign banks reported an increase in demand for C&I loans and for commercial real estate loans. Also, a noticeably smaller net fraction of domestic banks reported weaker demand for residential mortgages and consumer loans than had done so in the January survey.

In response to special questions on longer-term changes in lending standards and terms on C&I loans, domestic and foreign banks reported that, on net, lending standards for C&I loans were currently somewhat tighter than those prevailing in the 1996-97 period. Both groups reported, however, that many terms for C&I loans are somewhat easier, on net, than they had been in 1996 and 1997, a period thought to have been characterized by relatively accommodative lending practices. Banks whose lending standards or terms currently are tighter cited improved risk-management techniques as the primary influence on the evolution of their credit policies, whereas banks whose lending standards or terms currently are easier noted a significant increase in competition from other lenders as the primary reason.

C&I Lending
(Table 1, questions 1-9; Table 2, questions 1-9)

In the April survey, domestic banks as well as branches and agencies of foreign banks reported a further net easing of standards and terms on C&I loans. On net, nearly one-fourth of domestic banks reported easing their standards for large and middle-market firms over the past three months, about the same net percentage that has prevailed in recent surveys. About 70 percent of domestic and of foreign banks narrowed spreads of loan rates over their cost of funds for these borrowers in the three months ending with April, up substantially from 45 percent in the January survey and the largest shares reported since these questions were added to the survey in 1990. A large share of the foreign branches and agencies, on net, also reported reduced premiums on riskier loans and lower fees on credit lines. Many domestic respondents indicated that they had eased other terms for large and middle-market firms as well: Of the respondents, 40 percent had reduced the costs of credit lines, and about one-fourth had eased covenant restrictions, increased the maximum size of loans, or both. For small firms, nearly one-fourth of domestic banks had eased lending standards--up from 13 percent in January--and more than half had trimmed spreads, on net.

All the domestic institutions that had eased their lending standards and terms over the past three months cited more-aggressive competition from other banks or nonbank lenders as a somewhat important or--much more commonly--a very important reason for doing so. In addition, about half of those respondents cited a more-favorable or less-uncertain economic outlook as a reason for their move toward a less-stringent lending posture, although that figure was down from 60 percent in January. A notable share of domestic respondents that had eased standards or terms also indicated that the change reflected a higher tolerance for risk and greater liquidity in the secondary market. Branches and agencies of foreign banks that had eased lending terms also universally emphasized the importance of increased competition from other lenders, and half of the foreign respondents, on net, noted increased liquidity in secondary loan markets.

On net, 37 percent of domestic institutions--down from 45 percent in the January survey--reported an increase in demand for C&I loans from large and middle-market firms. The same net fraction of domestic respondents also indicated that demand from small firms had increased--up a bit from the previous survey. The domestic respondents experiencing stronger loan demand most frequently pointed to their borrowers' increased financing needs for investment in plant and equipment, accounts receivable, and inventory financing as sources of increased demand. The survey results for foreign banks suggest that demand was somewhat stronger, on net, and the banks that reported an increase credited mainly merger and acquisition financing for the change. About 40 percent of the domestic respondents, on net--down from nearly 50 percent in the January survey--reported that inquiries from potential business borrowers had increased over the past three months. At foreign banks, about one-fifth of branches and agencies, on net--up from 10 percent in the previous survey--reported an increase in inquiries from potential business borrowers over the past three months.

Longer-term changes in C&I lending conditions. Notable fractions of respondents to this survey have been reporting a net easing of standards or terms since the beginning of 2004, and other sources suggest that some C&I loan spreads have reached levels near those prevailing before lending terms began to tighten in 1998. Against this background, respondent banks were asked to compare their current standards and terms on C&I loans with those that they offered on similar loans in the 1996-97 period.

The results for lending standards point to a somewhat more-stringent lending posture. A small net fraction of domestic banks reported that their standards for loans to large and mid-sized firms were tighter than they had been in 1996 and 1997. For loans to small firms, the fraction of domestic banks that viewed their current lending standards as tighter than they had been in 1996 and 1997 was nearly equal to the fraction that indicated their standards were easier. Among respondents, the largest banks reported tighter current lending standards, on net, whereas smaller banks indicated standards were easier. At foreign banks, nearly half the branches and agencies characterized their lending standards as tighter than they were in 1996 and 1997, whereas only 16 percent characterized them as easier.

Both foreign and domestic banks reported that, on balance, pricing terms on C&I loans were currently easier than they were in 1996-97, but the net fractions reporting changes in nonprice terms were small. Half of domestic banks, on net, reported that loan spreads for large and middle-market firms were narrower than they were in the earlier period, and about one-third, on net, noted that fees on credit lines were lower. Smaller net percentages of foreign branches and agencies reported that pricing terms were easier than they were in 1996-97. Domestic banks suggested, on net, that loan covenants and collateral requirements were little changed relative to conditions in 1996-97. The net percentage of foreign banks that reported changes in loan covenants and collateral requirements was also small, although a few of those institutions indicated that they had eased these terms considerably over the period.

Not surprisingly, given the results of the most recent surveys, almost all the domestic banks and all the foreign banks that said that their C&I loan standards and terms were easier now than earlier reported that competition from other banks and nonbank lenders was a very important reason for the change. A large majority also noted that improved measurement and management of risk had increased their tolerance for risk. At the same time, however, a substantial fraction of the domestic and foreign banks that reported tighter current lending standards or terms indicated that improved measurement and management of risk had reduced their tolerance for risk. Almost half the domestic banks and two-thirds the foreign banks that reported having tighter lending conditions now than in the earlier period also noted increased concerns about corporate governance and financial reporting.

Commercial Real Estate Lending
(Table 1, questions 10-11; Table 2, questions 10-11)

Almost one-fourth of the domestic respondents, on net, had eased lending standards on commercial real estate loans over the past three months, about the same fraction as in the January survey. All but one of the twelve foreign branches and agencies active in commercial real estate lending reported unchanged standards. On net, 20 percent of the domestic respondents reported stronger demand for these loans in the April survey, nearly the same fraction as in the January survey. One-third of the foreign banks noted that demand had increased somewhat over the past three months, up from 15 percent in January.

Lending to Households
(Table 1, questions 12-19)

Credit standards on residential mortgages were largely unchanged, on net, in the April survey, in contrast to a small net easing of standards in January. Though demand for residential mortgage loans reportedly weakened again over the past three months, the net fraction of banks reporting lower demand fell to 18 percent, compared with about 25 percent in the past two surveys.

As has been the case since the middle of 2003, about 15 percent of the domestic respondents reported an increased willingness to make consumer installment loans. About 10 percent of banks, on net, indicated that they had eased standards on credit cards and non-credit-card consumer loans. Terms on consumer loans changed at only a few banks, and the movements were mixed. On net, banks indicated that demand for consumer loans weakened over the past three months, but the fraction doing so declined to 20 percent from 26 percent in January and nearly 30 percent last October.

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.