Senior Loan Officer Opinion Survey on
Bank Lending Practices

The July 2004 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 also queried banks about the extent to which recent  bond market developments have affected business lending.  A set of special questions focused on respondents  holdings and recent extensions of adjustable-rate mortgages.  Responses were received from fifty-six domestic and nineteen foreign banking institutions. 

Both domestic banks and U.S. branches and agencies of foreign banks further eased lending standards and terms for commercial and industrial (C&I) loans, on net, over the past three months.  A small net fraction of domestic institutions also eased lending standards for commercial real estate loans, while standards for this type of loan at foreign institutions were essentially unchanged.  A substantial net proportion of domestic banks reported stronger demand for both C&I and commercial real estate loans.  Foreign respondents indicated a sharp turnaround in C&I loan demand over the past three months; in contrast, demand for commercial real estate loans at these institutions was reportedly unchanged over the same period.  In the household sector, a small net fraction of domestic banks eased credit standards on residential mortgage loans, and the demand for this type of loan was said to be slightly weaker, on net.  The demand for consumer loans of all types reportedly deteriorated as well over the past three months, while lending standards and terms for these loans were about unchanged. 
 

Lending to Businesses
(Table 1, questions 1-9; Table 2, questions 1-9) 

In the July survey, both domestic and foreign institutions reported a further net easingof credit standards on C&I loans.  On net, one-fifth of domestic banks indicated that they had eased standards for large and middle-market business borrowers over the past three months, a slightly lower net fraction than in the April survey.  In contrast, only 4percent of domestic institutions, on net, eased their lending standards for small firms, a notable decline from the 20 percent figure in April.  The net percentage of U.S. branches and agencies of foreign banks that stated they had eased their lending standards for C&I loans rose from 30 percent in April to 42 percent in the current survey.

Domestic and foreign respondents also indicated that they had eased a number of lending terms on business loans over the past three months.  On net, about 30 percent of domestic commercial banks reported that they had lowered spreads of loan rates over their cost of funds for large and middle-market firms as well as for small firms.  Among foreign institutions, more than one-half of respondents, on net, reported having trimmed spreads on C&I loans over the past three months.  In addition, sizable net fractions of both domestic and foreign institutions noted that they had eased covenants on C&I loans, especially for loans to large and middle-market firms.  As in the April survey, both domestic and foreign respondents indicated that they had eased terms on business credit lines, both by increasing the size of credit lines and by reducing their cost. 

More than 90 percent of domestic and almost 70 percent of foreign respondents that eased their lending standards and terms over the previous three months cited moreaggressive competition from other banks or nonbank lenders as the most important reason for the change.  In addition, 72 percent of domestic and 77 percent of foreign institutions pointed to a more favorable economic outlook as a reason for easing their business lending policies.  Domestic institutions also frequently pointed to improvements in industry-specific problems and an increased tolerance for risk as reasons for their move toward a less stringent lending posture.  The small number of domestic banks that had tightened their business lending standards or terms over the past three months generally cited a reduced tolerance for risk or a worsening of industry-specific problems as the reason for the change. 
 

C&I loan demand. 

Consistent with the recent turnaround in banks  C&I lending,more than one-third of domestic banks, on net, reported an increase in demand for business loans from large and middle-market borrowers over the past three months, a moderately higher net percentage than in the April survey; about 40 percent of banks, on net, also reported stronger loan demand from small firms.  In addition, 45 percent of domestic respondents reported an increase in inquiries from potential business borrowers over the same period, about the same fraction as in the April survey.  Domestic respondents that experienced stronger loan demand over the past three months pointed to their borrowers  increased financing needs for accounts receivable and inventories as well as for investment in plant and equipment.  Demand for business loans was also reported to have picked up at branches and agencies of foreign banks, which had reported a weakening in demand in the April survey.  More than one-fourth of these institutions experienced stronger demand in July; most of them attributed the pickup to an increase in customer needs for M&A financing. 

In light of the sharp decline in net bond issuance by nonfinancial corporations in recent months, a special question on business financing asked banks about the extent to which developments in the bond market had affected their C&I lending.  Although only 11 percent of domestic banks reported a moderate decline in loan paydowns as a resultof the reduced pace of bond issuance, more than one-fifth of foreign respondents noted that lower bond issuance had caused a moderate or a substantial reduction in C&I loan paydowns. 
 

Commercial real estate lending. 

On net, 9 percent of domestic banks reported thatthey had eased lending standards on commercial real estate loans over the past three months, a slightly lower net fraction than in the April survey.  Lending standards for this type of loan at U.S. branches and agencies of foreign banks were essentially unchanged.  The net percentage of domestic banks that experienced an increase in demand for commercial real estate loans moved up from 20 percent in April to 25 percent in the current survey.  In contrast, demand for such loans at foreign institutions was reportedly unchanged, on net, over the past three months. 
 

Lending to Households
(Table 1, questions 10-20) 

The net proportion of domestic commercial banks indicating an increased willingnessto make consumer installment loans declined to 9 percent in the July survey from 17 percent in the April survey.  Standards for approving applications for credit card and other consumer loans, as well as most terms on these loans, were said to be unchanged, on net, in the current survey.  On net, 12 percent of banks reported weakerconsumer loan demand in July, compared with 22 percent of institutions, on net, that reported stronger demand in April.  This reported slackening in demand is not surprising given the slowdown in consumer loan growth at banks during the spring. 

In the current survey, 6 percent of domestic banks, on net, indicated that they had eased credit standards on residential mortgage loans, about the same as in April.  On net,  8 percent of respondents experienced weaker demand for residential real estate loans over the past three months, a slightly higher net fraction than in the April survey. 

The July survey included a set of special questions focusing on the share of adjustable-rate mortgages (ARMs) on banks  books, as well as on the composition of ARMs originated during the past three months.¹ 

About 45 percent of the domestic respondents indicated that  conventional  ARMs  adjustable-rate mortgages that reprice at regular intervals   accounted for less than  10 percent of all home mortgage loans on their books; indeed, most of these institutions reported that such loans accounted for less than 5 percent of their residential mortgage loans.  Only 12 percent of respondents noted that the share of conventional ARMs  was greater than 50 percent.  In contrast, 30 percent of domestic banks estimated that  hybrid  ARMs   adjustable-rate mortgages for which the interest rate is initially fixed for a multi-year period but subsequently adjusts more frequently   accounted for more than one-half of all residential mortgage loans on their books. 

In the case of conventional ARMs, the respondents indicated that on average almost 90 percent of these loans will be repriced within the next twelve months.  In contrast, banks estimated that on average only 12 percent of hybrid ARMs will be repriced within one year; almost 60 percent of hybrid ARMs on average, will not be repriced for at least three years. 

More than one-half of the banks reported that hybrid ARMs accounted for at least 75 percent of all ARMs originated during the past three months, and another 17 percent of respondents indicated that such loans accounted for between 30 percent and 75 percent of all originations over that period.
 

1.  The number of banks that responded to these special questions varied from thirty-six to fiftydepending on the question.  According to the first-quarter Call reports, the respondent banks accountedfor as little as 35 percent and for as much as 57 percent of all residential real estate loans on the books of domestic commercial banks as of January 31, 2004.

This document was prepared by Fabio Natalucci and Egon Zakrajsek with the research assistance of Jason T. Grimm, Division of Monetary Affairs, Board of Governors of the Federal Reserve System.

The charts and tables for this report are available in  Acrobat (PDF) format. Obtaining the Acrobat Reader

Charts (13.5 KB PDF)
Measures of lending practices from current and previous surveys
Chart data (ASCII)

Table 1 (26.0 KB PDF)
Summary of responses from U.S. banks 

Table 2 (17.2 KB PDF)
Summary of responses from branches and agencies of foreign banks 

Full report (62.6 KB PDF)

Last update: August 16, 2004 2:00 PM