Senior Loan Officer Opinion Survey on
Bank Lending Practices
The November 1997 Senior Loan Officer Opinion Survey on Bank Lending Practices
(covering, for the most part, changes over the past three months) posed questions
about bank lending standards and terms, loan demand by businesses and households,
collateralized loan obligations, the causes of the recent rise in measured spreads
on commercial and industrial loans, and the renegotiation of consumer loans on
A small net percentage of the domestic respondents--about 5 percent--reported
easing standards for commercial and industrial loans to large and middle market
firms and to small businesses over the past three months (chart). About 40
percent, on net, narrowed spreads of C&I loan rates over their bank's cost of
funds on loans to borrowers in both size categories. Smaller percentages eased
other terms, including the costs of credit lines, the maximum size of credit
lines, and loan covenants. Only a couple of banks eased collateralization
requirements. The easing of loan terms was somewhat more widespread in November
than earlier this year, especially for loans to small businesses. As in the
earlier surveys, those banks that eased pointed to increased competition from
other banks and from nonbank lenders as the main reasons for the changes.
The November survey was the eighth in a row to show a net tightening of standards
for consumer loans. However, the net percentage of banks tightening was lower in
the August and November surveys than earlier in the year, suggesting that many
banks have completed adjustments to take account of the deterioration in the
performance of these loans that occurred over the past three years. In the latest
survey, 25 percent of the respondents reported tighter standards for credit card
applications and 10 percent reported tighter standards for other consumer loans.
Both percentages were little changed from the August survey. By contrast, these
percentages peaked at nearly 50 and 25 percent, respectively, late last year.
Recently, several large banks have established programs under which they package
and sell securities backed by commercial and industrial loans. These securities
are commonly called "collateralized loan obligations" or CLOs.
²   The November
survey asked the respondents about such programs. Four of the domestic banks and
six of the foreign branches and agencies reported having programs to sell
collateralized loan obligations, and three domestic respondents and four foreign
respondents indicated that they would have such programs within a year. Thus,
more than a tenth of the domestic respondents and nearly half of the foreign
respondents will likely have issued CLOs by the end of next year. Moreover,
nearly a third of the domestic respondents and a fifth of the foreign respondents
indicated that they were considering establishing a CLO program. The respondents
attributed the recent interest in CLOs to a desire by banks to deploy their
capital efficiently by moving relatively low risk loans off their balance sheets.
They also noted that the continued development of the asset-backed security market
has reduced the cost of such programs, and that, given current market interest
rates, CLOs can reduce funding costs.
According to the Federal Reserve's quarterly Survey of Terms of Business Lending, spreads of rates on larger business loans (those of $1 million or more) over market rates have widened over the past year. This result appears to be at odds with press reports and the results of past Senior Loan Officer Surveys, which suggest that spreads have narrowed. The November survey asked the respondents what factors likely contributed to this divergence. They indicated that the rise in measured spreads on commercial and industrial loans found by the Survey of Terms of Business Lending most likely occurred despite a narrowing of spreads on loans of a given risk, and reflected a more-than-offsetting rise in the average risk of new loans. They attributed the rise in risk to an increased demand for riskier credits, especially those for mergers and acquisitions. In addition, some respondents reported that their bank had decided to accept increased risk in order to earn higher returns.
In recent years the number of households contacting credit counseling services has
increased substantially, as has the number of households establishing debt
repayment plans with their creditors with the assistance of such services. The
November survey asked banks about their willingness to agree to concessionary
terms on consumer loans as a part of a debt repayment plan. The responses showed
a widespread willingness to provide concessionary terms and an increase in the use
of concessions in recent years. More than two-thirds of the respondents indicated
that they were willing to agree to "some" concessions (perhaps including reduced
late fees, lower interest rates, or longer repayment periods) as a part of a debt
repayment plan, and a couple of banks said they were willing to make "substantial"
concessions. Less than 10 percent of the respondents were completely unwilling to
make concessions. Generally, the respondents indicated that the fraction of their
banks' consumer loan outstandings restructured on concessionary terms as a part of
a debt repayment plan was fairly small: either less than 1 percent or between 1
and 3 percent of outstandings. Half the respondents indicated that this
percentage had increased over the past three years. In part, the rise may reflect
a greater willingness on the part of banks to make concessions. Nearly half of
the banks were more willing to make such concessions today than they were three
1. About 40 percent of the survey responses were reported to the Reserve Banks on or before October 27, when the stock market fell sharply and risk spreads on private securities widened. An even larger share of the responses likely reflect loan market conditions before the stock market's decline, however, because some respondents may have decided on their responses well in advance of the time they were reported to the Reserve Banks.
2. Banks have issued securities backed by loans guaranteed by the Small Business Administration for some time. These securities are distinct from CLOs.
Charts (17 KB PDF)
Measures of lending practices from current and previous surveys
Chart data (ASCII)
Table 1 (35 KB PDF)
Table 2 (17 KB PDF)
Full report (78 KB PDF)
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Last update: November 17, 1997, 3:00 PM