Senior Loan Officer Opinion Survey on Bank Lending Practices
The January 2019 Senior Loan Officer Opinion Survey on Bank Lending Practices
The January 2019 Senior Loan Officer Opinion Survey on Bank Lending Practices addressed changes in the standards and terms on, and demand for, bank loans to businesses and households over the past three months, which generally corresponds to the fourth quarter of 2018.1
Regarding loans to businesses, respondents to the January survey indicated that, on balance, banks tightened standards for commercial real estate (CRE) loans, while standards and most terms on commercial and industrial (C&I) loans remained basically unchanged. Meanwhile, demand for loans to businesses reportedly weakened.
For loans to households, banks reported that their lending standards for most categories of consumer loans and residential real estate loans remained basically unchanged on balance. Credit cards were the one exception, with standards reportedly tightening over the fourth quarter. Meanwhile, banks reported weaker demand for all categories of loans to households.
In addition, the survey included a set of special questions inquiring about banks’ expectations for lending policies and loan performance over 2019. Banks reported expecting to tighten standards for all categories of business loans as well as credit card loans and jumbo mortgages. Demand for most loan types is expected to weaken, on net, with the one exception being credit card loans, for which demand is expected to remain unchanged. Meanwhile, banks anticipate that loan performance will deteriorate for all surveyed categories.
Lending to Businesses
Questions on commercial and industrial lending. Banks reported that standards for C&I loans to both large and middle-market firms and to small firms remained basically unchanged over the past three months.3 Most terms on such loans remained basically unchanged as well, although a moderate net share of banks reported increasing the premiums charged on riskier loans to large and middle-market firms and a modest net share of banks reported doing so for loans to small firms. Large banks, however, did report easing some key terms on loans to large and middle-market firms; moderate net shares of the largest banks reported increasing maximum credit lines, easing loan covenants, and narrowing loan rate spreads over costs of funds.4 Meanwhile, foreign banks reported tightening standards and most terms for C&I loans.
Nearly every bank that reported having eased standards or terms over the past three months attributed this change, in part, to increased competition from other banks or nonbank lenders. No other reason queried was cited as important by a majority of banks. The reported reasons for tightening standards or terms were more varied. A less favorable or more uncertain economic outlook was the most cited reason for tightening, with reduced tolerance for risk and increased concerns about the effects of legislative changes, supervisory actions, or changes in accounting standards also being cited by more than half of the banks that reported tighter standards or terms.
Regarding the demand for C&I loans, a modest net share of domestic banks reported that demand for C&I loans from large and middle-market firms weakened, while a moderate net share of banks reported weakened demand from small firms. Meanwhile, a moderate net share of foreign banks reported weaker demand for C&I loans over the fourth quarter. A majority of the banks that reported weaker demand indicated that decreases in customers’ needs to finance mergers and acquisitions as well as investment in plants and equipment contributed to weaker demand, as did a shift in customers’ borrowing toward other bank or nonbank sources.
Questions on commercial real estate lending. Moderate net fractions of banks reported tightening their standards for loans secured by multifamily residential properties and loans for construction and land development purposes, while a modest net share of banks reported tightening standards for loans secured by nonfarm nonresidential properties. Meanwhile, a significant net fraction of banks reported weaker demand for construction and land development loans, and a modest net share reported weaker demand for multifamily loans. Demand for loans secured by nonfarm nonresidential properties was basically unchanged on net.
Lending to Households
(Table 1, questions 13–26)
Questions on residential real estate lending. On balance, banks reported that standards for residential real estate lending remained basically unchanged over the past three months. Standards were reported to be basically unchanged for all seven home purchase mortgage categories as well as for revolving home equity lines of credit (HELOCs). Meanwhile, significant net shares of banks reported weaker demand for all categories of residential mortgages, and a moderate net share of banks reported weaker demand for HELOCs.
Questions on consumer lending. A modest net share of banks reported tighter standards on credit card loans, while standards for auto loans and other consumer loans remained basically unchanged, on balance, over the fourth quarter. Most terms for consumer loans were reported as basically unchanged on net. However, a modest net share of banks reported tighter limits for credit cards, while moderate and modest net shares of banks reported wider loan rate spreads on auto loans and other consumer loans, respectively. Meanwhile, moderate net shares of banks reported weaker demand for the three consumer loan categories.
Special Questions on Banks’ Outlook for 2019
A set of special questions asked banks about their expectations for lending standards, loan demand, and loan performance over 2019, assuming that economic activity progresses in line with consensus forecasts. On balance, banks reported expecting tighter standards, weaker demand, and worse loan performance, for most loan categories.
Regarding expectations for loans to businesses, moderate net fractions of banks reported that they expect to tighten standards on C&I loans to firms of all sizes, while significant net shares of banks expect to tighten standards for all three CRE loan categories. Meanwhile, demand is expected to weaken for all business loans: Moderate net shares of banks reported expecting weaker demand for C&I loans to firms of all sizes, significant net shares of banks expect weaker demand for loans secured by multifamily properties or nonfarm nonresidential properties, and a major net share of banks expect weaker demand for construction and land development loans. Additionally, banks reported expecting loan performance, as measured by charge-offs and delinquencies, to deteriorate, with either moderate or significant net shares of banks reporting expecting performance to deteriorate for the surveyed business loan categories.5
The outlook for loans to households over the next year is broadly similar to the outlook for loans to businesses, although somewhat less uniform across loan categories. A moderate net share of banks reported expecting tighter standards for credit card loans, and a modest net share reported expecting tighter standards on nonconforming jumbo residential mortgage loans. In contrast, standards for auto loans and GSE (government sponsored enterprise)-eligible mortgages are expected to remain basically unchanged on net. Meanwhile, either moderate or significant net shares of banks reported expecting weaker demand for these loans, with the exception of credit card loans, for which demand is expected to remain basically unchanged. Loan performance is also reported as being expected to deteriorate for all categories of loans to households, with modest or moderate net shares of banks expecting performance to deteriorate for mortgages and consumer loans to prime borrowers, and significant net shares of banks expecting performance to deteriorate for consumer loans to nonprime borrowers.
Banks that reported expecting to tighten standards for any loan category were additionally asked to assess the importance of several potential reasons for the expected tightening.6 An expected deterioration in collateral values was the most widely cited reason for expecting to tighten standards. In addition, a majority of banks reported that an expected reduction in their risk tolerance and an expected deterioration in the quality of their loan portfolios contributed to the expected tightening of standards.
This document was prepared by David Glancy, with the assistance of Max Gross, Division of Monetary Affairs, Board of Governors of the Federal Reserve System.
1. Responses were received from 73 domestic banks and 22 U.S. branches and agencies of foreign banks. Respondent banks received the survey on or after December 21, 2018, and responses were due by January 7, 2019. Unless otherwise indicated, this summary refers to the responses of domestic banks. Return to text
2. For questions that ask about lending standards or terms, “net fraction” (or “net percentage”) refers to the fraction of banks that reported having tightened (“tightened considerably” or “tightened somewhat”) minus the fraction of banks that reported having eased (“eased considerably” or “eased somewhat”). For questions that ask about loan demand, this term refers to the fraction of banks that reported stronger demand (“substantially stronger” or “moderately stronger”) minus the fraction of banks that reported weaker demand (“substantially weaker” or “moderately weaker”). For this summary, when standards, terms, or demand are said to have “remained basically unchanged,” the net percentage of respondent banks that reported either tightening or easing of standards or terms, or stronger or weaker demand, is greater than or equal to 0 and less than or equal to 5 percent; “modest” refers to net percentages greater than 5 and less than or equal to 10 percent; “moderate” refers to net percentages greater than 10 and less than or equal to 20 percent; “significant” refers to net percentages greater than 20 and less than 50 percent; and “major” refers to net percentages greater than or equal to 50 percent. Return to text
3. Large and middle-market firms are defined as firms with annual sales of $50 million or more, and small firms are those with annual sales of less than $50 million. Return to text
4. Large banks are those with over $50 billion in total assets as of September 30, 2018. The threshold for defining a large bank has been revised up from $20 billion since the last survey. Return to text
5. For the questions about the performance of business loans, banks were queried about expectations for the performance for four types of C&I loans (nonsyndicated loans, syndicated nonleveraged loans, syndicated leveraged loans, and loans to small firms) and three types of CRE loans (multifamily loans, nonfarm nonresidential loans, and construction and land development loans). Return to text
6. Potential reasons for expecting to change standards included changes in (1) capital or liquidity position, (2) spread of loan rates over cost of funds, (3) collateral values, (4) competition from other bank or nonbank lenders, (5) risk tolerance, (6) ease of selling loans in secondary market, (7) credit quality of loan portfolio, and (8) concern about the effects of legislative or regulatory changes. Return to text