Senior Loan Officer Opinion Survey on Bank Lending Practices
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The April 2023 Senior Loan Officer Opinion Survey on Bank Lending Practices
The April 2023 Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS) addressed changes in the standards and terms on, and demand for, bank loans to businesses and households over the past three months, which generally correspond to the first quarter of 2023.1
Regarding loans to businesses, survey respondents reported, on balance, tighter standards and weaker demand for commercial and industrial (C&I) loans to large and middle-market firms as well as small firms over the first quarter.2 Meanwhile, banks reported tighter standards and weaker demand for all commercial real estate (CRE) loan categories.
For loans to households, banks reported that lending standards tightened across all categories of residential real estate (RRE) loans other than government-sponsored enterprise (GSE)-eligible and government residential mortgages, which remained basically unchanged. Meanwhile, demand weakened for all RRE loan categories. In addition, banks reported tighter standards and weaker demand for home equity lines of credit (HELOCs). Standards tightened for all consumer loan categories; demand weakened for auto and other consumer loans, while it remained basically unchanged for credit cards.
The April SLOOS included three sets of special questions, which inquired about banks' changes in lending policies for CRE loans over the past year; about the reasons why banks changed standards for all loan categories over the first quarter; and about banks' expectations for changes in lending standards over the remainder of 2023 and reasons for these changes.
In response to the first set of special questions, banks, on balance, reported tightening lending policies for all categories of CRE loans over the past year, with the most frequently reported changes pertaining to wider spreads of loan rates over banks' cost of funds and lower loan-to-value ratios.
Regarding the second set of special questions about reasons for changing standards on all loan categories in the first quarter, banks cited a less favorable or more uncertain economic outlook, reduced tolerance for risk, deterioration in collateral values, and concerns about banks' funding costs and liquidity positions.
Finally, regarding the last set of special questions about banks' outlook for lending standards over the remainder of 2023, banks reported expecting to tighten standards across all loan categories. Banks most frequently cited an expected deterioration in the credit quality of their loan portfolios and in customers' collateral values, a reduction in risk tolerance, and concerns about bank funding costs, bank liquidity position, and deposit outflows as reasons for expecting to tighten lending standards over the rest of 2023.
As in past releases, survey results are tabulated for two domestic bank size categories: large banks and other banks. Banks in the large category have $50 billion or more in domestic assets as of December 31, 2022; banks in the other category have under $50 billion in domestic assets. This release includes additional comments in the text that further disaggregate large banks into the largest banks and mid-sized banks. The largest banks are defined as those with total domestic assets of $250 billion or more as of December 31, 2022, and mid-sized banks as those with assets between $50 billion and $250 billion. In general, the tightening in standards for business loans was more frequently reported across the mid-sized banks than either the largest banks or other banks, both for the first quarter and in expectation for the rest of 2023. As reasons for tightening standards on all loan categories, both in the first quarter and over the rest of the year, other and mid-sized banks reported concerns about their liquidity positions, deposit outflows, and funding costs more frequently than the largest banks.
Lending to Businesses
(Table 1, questions 1–12, 27–29; table 2, questions 1–11)
Questions on commercial and industrial lending. Over the first quarter, significant net shares of banks reported having tightened standards on C&I loans to firms of all sizes.3 Banks also reported having tightened all queried terms on C&I loans to firms of all sizes over the first quarter. Tightening was most widely reported for premiums charged on riskier loans, spreads of loan rates over the cost of funds, and costs of credit lines. In addition, significant net shares of banks reported having tightened the maximum size of credit lines, loan covenants, and collateralization requirements to firms of all sizes.4 The net fractions of banks tightening standards for C&I loans was higher for large banks compared with other banks. This reflects more widespread tightening reported among the mid-sized banks compared with either the largest banks or other banks. Mid-sized banks generally reported tightening both price and nonprice terms more frequently than the largest banks and other banks.5 Significant net shares of foreign banks reported having tightened standards as well as most queried terms for C&I loans.
Major shares of banks that reported having tightened standards or terms cited a less favorable or more uncertain economic outlook, reduced tolerance for risk, worsening of industry-specific problems, and deterioration in their current or expected liquidity position as important reasons for doing so. In addition, significant shares of banks also cited decreased liquidity in the secondary market for C&I loans; increased concerns about the effects of legislative changes, supervisory actions, or changes in accounting standards; deterioration in their current or expected capital position; and less aggressive competition from other banks or nonbank lenders as important reasons for tightening lending standards and terms. Although banks of all sizes cited the same reasons for tightening, mid-sized and other banks more frequently cited the bank's liquidity position; industry-specific problems; reduced risk tolerance; and increased concerns about the effects of legislative changes, supervisory actions, or changes in accounting standards.
Regarding demand for C&I loans over the first quarter, major net shares of banks reported weaker demand for loans from firms of all sizes. Furthermore, a significant net share of banks reported a decrease in the number of inquiries from potential borrowers regarding the availability and terms of new credit lines or increases in existing lines. Greater net shares of mid-sized and other banks reported weaker demand from firms of all sizes compared with the largest banks. Similarly, moderate net shares of foreign banks reported weaker demand for C&I loans over the first quarter.
Of the banks reporting weaker demand for C&I loans, major shares cited investment in plant or equipment, mergers and acquisitions financing needs, inventory financing, and accounts receivable financing needs as important reasons for weaker demand.
Questions on commercial real estate lending. Over the first quarter, major net shares of banks reported tightening standards for all types of CRE loans. Such tightening was more widely reported by mid-sized banks than by either the largest or other banks. Meanwhile, major net shares of banks reported weaker demand for loans secured by nonfarm nonresidential properties, construction and land development loans, and loans secured by multifamily properties. Similarly, major net shares of foreign banks reported tighter standards for CRE loans, while significant net shares of foreign banks reported weaker demand for such loans.
Special questions on changes in banks' credit policies on commercial real estate loans over the past year. A set of special questions asked banks about changes in their credit policies for each major CRE loan category over the past year. These questions have been asked in the April survey for the past seven years.
Banks reported having tightened all the terms surveyed on all categories of CRE loans. For construction and land development loans, major net shares of banks widened the spread on loan rates, lowered loan-to-value ratios, and increased debt service coverage ratios; significant shares of banks decreased maximum loan size and market areas covered; a moderate net share of banks shortened the length of interest-only payment periods, and a modest net share of banks decreased maximum loan maturity. For nonfarm nonresidential loans, major net shares of banks widened the spread on loan rates and lowered the loan-to-value ratio; significant net shares of banks increased debt service coverage and decreased maximum loan size and market areas served; moderate net shares of banks shortened length of interest-only payment period and decreased the maximum loan maturity. For multifamily loans, major net shares of banks widened the spread on loan rates and lowered the loan-to-value ratio; significant net shares of banks increased debt service coverage and decreased maximum loan size; and moderate net shares of banks decreased the length of interest-only payment periods, market areas served, and maximum loan maturity.
A major net share of foreign banks reported tightening the spread on loan rates for nonfarm nonresidential loans, while significant net shares reported tightening the maximum loan size, lowering the loan-to-value and debt service coverage ratios, and reducing market areas served. Significant net shares of foreign banks also reported widening the spread on loan rates and decreasing the maximum loan size for construction and land development loans, as well as debt service coverage and lowering loan-to-value ratios for multifamily loans. A major net share of foreign banks reported tightening the spread of loan rates for multifamily loans.
Lending to Households
(Table 1, questions 13–26)
Questions on residential real estate lending. Over the first quarter, lending standards tightened for most RRE loan categories and for HELOCs.6 Significant net shares of banks reported tightening standards for subprime mortgages, HELOCs, and non-QM jumbo mortgages, while moderate net shares reported tighter standards on QM jumbo, non-QM, non-jumbo, and QM non-jumbo, non-GSE-eligible mortgages. Overall, banks reported that standards remained basically unchanged for GSE-eligible and government residential mortgages. Across bank size categories, a moderate net share of mid-sized banks reported easing standards for GSE-eligible loans, while a moderate net share of other banks reported tightening standards on such loans.
Meanwhile, major net shares of banks reported weaker demand for all RRE loans other than government, QM non-jumbo, non-GSE-eligible, and HELOCs, for which significant net shares of banks reported weaker demand.
Questions on consumer lending. Over the first quarter, significant net shares of banks reported having tightened lending standards for credit card, auto, and other consumer loans. By bank sizes, a greater net share of the largest banks reported tightening standards for credit card loans compared with mid-sized and other banks. Consistent with tightened standards for credit card loans, banks also reported having tightened almost all queried terms on credit card loans. Specifically, significant net shares of banks reported increasing minimum credit score requirements and decreasing credit limits, while moderate net shares reported decreasing the extent to which loans are granted to some customers that do not meet credit scoring thresholds and widening the interest rate spreads charged on balances.7
In addition, banks reported having tightened all queried terms on auto loans and other consumer loans on net. In particular, a significant net share of banks reported wider interest rate spreads on auto loans, while moderate net shares reported raising minimum repayments, raising minimum credit scores, decreasing the extent to which loans are granted to some customers that do not meet credit scoring thresholds, and decreasing maximum maturity. For other consumer loans, a significant net share of banks reported widening spreads over the cost of funds, while moderate net shares reported raising minimum credit scores and reducing the extent to which loans are granted to some customers that do not meet credit scoring thresholds. Modest net shares of banks reported higher minimum repayments and lower credit limits.
Regarding demand for consumer loans, a significant net share of banks reported weaker demand for auto while a moderate net share of banks reported weaker demand for other consumer loans. Demand for credit card loans remained basically unchanged on net.
Special Questions on Banks' Reasons for Changing Standards and Outlook for 2023
(Table 1, questions 30–32; table 2, questions 12–14)
In a set of special questions, the April SLOOS asked about banks' reasons for changing standards or terms for loans across all loan categories over the first quarter. Overall, major net shares of banks reported that a less favorable or more uncertain economic outlook was an important reason for tightening, as well as reduced tolerance for risk, deterioration in customer collateral values, and concerns about banks' funding costs and liquidity positions.
In comparison to the largest banks, mid-sized and other banks more frequently cited concerns regarding their liquidity positions, deposit outflows, and funding costs as reasons for tightening. Major shares of mid-sized banks cited the economic outlook, reduced tolerance for risk, concerns about the bank's liquidity position, deterioration in collateral values, deterioration in credit quality of loan portfolio, bank funding costs, and deposit outflows as reasons for tightening. Major shares of other banks cited the economic outlook, bank funding costs, reduced tolerance of risk, collateral values, concerns about their liquidity position, and deposit outflows as reasons for tightening.
For foreign banks, major shares reported that a less favorable or more uncertain economic outlook, reduced tolerance of risk, deterioration in customers' collateral values, and increased difficulty of selling loans on the secondary market were important reasons for tightening.
The April survey also included a set of special questions inquiring about banks' expectations for changes in lending standards over the remainder of 2023, assuming that economic activity evolves in line with consensus forecasts. On balance, banks widely reported expecting to tighten their lending standards over the rest of the year.
Major net shares of banks reported expecting to tighten standards for C&I loans to firms of all sizes and for all categories of CRE loans over 2023. Meanwhile, significant net shares of banks also reported expecting to tighten standards for nonconforming jumbo mortgage loans and all consumer loan categories. A moderate net share of banks reported expecting to tighten standards on GSE-eligible residential mortgage loans. Across all banks, widely cited reasons for expecting to tighten lending standards over 2023 include a deterioration in credit quality of the bank's loan portfolio, expected deterioration in collateral values, a reduction in risk tolerance, and concerns about the bank's funding costs, liquidity position, and deposit outflows. Significant net shares of foreign banks expect to tighten for all categories of C&I and CRE loans, most notably citing reduction in risk tolerance, deterioration in collateral values, reduction in ease of selling loans, and deterioration in credit quality of loan portfolio.
Across bank size categories, major shares of the largest banks cited expected deterioration in credit quality, deterioration in collateral values, and reduction in risk tolerance as important reasons for expecting standards to tighten for the remainder of 2023. Major shares of other banks reported all the same reasons for expecting to tighten as the largest banks and additionally cited concerns about their banks' funding costs, banks' liquidity position, and deposit outflows. Major shares of mid-sized banks cited all the same reasons for expecting to tighten as other banks and additionally cited concerns about their capital positions, and increased concerns about the effects of future legislative changes, supervisory actions, or changes in accounting standards as reasons for expecting to tighten.
This document was prepared by Andrew Castro and Ria Sonawane, with the assistance of Solveig Baylor and Brandon Nedwek, Division of Monetary Affairs, Board of Governors of the Federal Reserve System.
1. Responses were received from 65 domestic banks and 19 U.S. branches and agencies of foreign banks. Respondent banks received the survey on March 27, 2023, and responses were due by April 7, 2023. Unless otherwise indicated, this summary refers to the responses of domestic banks. Return to text
2. Large and middle-market firms are defined as firms with annuals sales of $50 million or more, and small firms are those with annual sales of less than $50 million. Return to text
3. 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
4. Banks were asked about the costs, maximum size, and maximum maturity of credit lines, spreads of loan rates over the bank's cost of funds, premiums charged on riskier loans, terms on loan covenants, collateralization requirements, and the use of interest rate floors. Return to text
5. Other banks were most likely to report tightening collateralization requirements and the use of interest rate floors, while mid-sized banks were most likely to report tightening all other terms. Return to text
6. The seven categories of residential home-purchase loans that banks are asked to consider are GSE-eligible, government, QM non-jumbo non-GSE-eligible, QM jumbo, non-QM jumbo, non-QM non-jumbo, and subprime. See the survey results tables that follow this summary for a description of each of these loan categories. The definition of a QM was introduced in the 2013 Mortgage Rules under the Truth in Lending Act (12 C.F.R. pt. 1026.32, Regulation Z). The standard for a QM excludes mortgages with loan characteristics such as negative amortization, balloon and interest-only payment schedules, terms exceeding 30 years, alt-A or no documentation, and total points and fees that exceed 3 percent of the loan amount. In addition, a QM requires that the monthly debt-to-income ratio of borrowers not exceed 43 percent. For more on the ability to repay and QM standards under Regulation Z, see Consumer Financial Protection Bureau (2019), "Ability to Repay and Qualified Mortgage Standards Under the Truth in Lending Act (Regulation Z)," webpage, https://www.consumerfinance.gov/regulations/ability-to-repay-and-qualified-mortgage-standards-under-the-truth-in-lending-act-regulation-z. Return to text
7. Banks were asked about changes in credit limits (credit card accounts and other consumer loans only), maximum maturity (auto loans only), loan rate spreads over costs of funds, the minimum percent of outstanding balances required to be repaid each month, the minimum required credit score, and the extent to which loans are granted to borrowers not meeting credit score criteria. Return to text