Senior Loan Officer Opinion Survey on
Bank Lending Practices

The April 2002 Senior Loan Officer Opinion Survey on Bank Lending Practices focused on changes in the supply of and demand for bank loans to businesses and households over the past three months. The survey also contained two sets of supplementary questions. The first set addressed changes in banks' lending policies with regard to commercial paper backup lines of credit over the past twelve months, and the second focused on the effect of problems in the market for terrorism insurance on commercial real estate lending. Loan officers representing fifty�six large domestic banks and twenty�one U.S. branches and agencies of foreign banks participated in the April survey.

Results of the survey indicate some further tightening of standards and terms for loans to both businesses and households. However, the number of domestic and foreign banking institutions that reported having tightened standards and terms on commercial and industrial (C&I) loans over the past three months moved down considerably from the January survey. The net fraction of domestic institutions that indicated that they had tightened standards for commercial real estate loans in the April survey also declined, though it remained relatively high. Banks continued to report a weakening of demand for C&I and commercial real estate loans, albeit at a lesser rate than in January. According to the domestic respondents, standards for residential mortgage loans were largely unchanged over the past three months, and demand for these loans was moderately stronger on net. As in January, a relatively small portion of domestic banks, on net, reported tightening standards for consumer loans. For the second consecutive survey, banks reported tightening terms on non�credit�card loans to a greater extent than they have terms on credit card loans. Demand for consumer loans was roughly unchanged over the past three months.


Lending to Businesses
(Table 1, questions 1-17; Table 2, questions 1-17)

Commercial and industrial loans. Compared with the January survey, significantly smaller fractions of domestic banks and U.S. branches and agencies of foreign banks reported that they had tightened standards on C&I loans. The percentage of domestic banks that reported having tightened their standards on C&I loans to large and middle�market firms over the past three months moved down to 25 percent from 45 percent in the previous survey; the percentage tightening standards on business loans to small firms declined even more, from more than 40 percent in January to about 15 percent in April. Similarly, the fraction of U.S. branches and agencies of foreign banks that had tightened standards for customers seeking C&I loans or credit lines fell from 70 percent in January to about 40 percent in the current survey.

In April, smaller fractions of domestic banks reported tightening most of the lending terms listed in the survey for large and middle�market firms than in January. The largest change was in the net fraction of banks that had increased spreads of loan rates over their cost of funds, which fell from 40 percent in January to about 25 percent in the current survey. In addition, somewhat smaller net percentages of banks reported that they had tightened loan covenants and increased the cost of credit lines for these customers over the past three months. However, about 45 percent of domestic banks increased premiums charged on riskier loans to large and middle�market firms, about the same as in the January survey.

Changes in terms on C&I loans to small firms followed a similar though more pronounced pattern. The net fraction of domestic banks that tightened covenants on loans to small firms fell from 40 percent in January to only 12 percent in the current survey; the net percentage of banks that increased spreads of loan rates over their cost of funds moved down from 37 percent to 13 percent over the same period. The net fraction of banks that reported increasing premiums charged on riskier loans to small firms over the past three months edged down from 40 percent in January to 34 percent in the current survey.

The fraction of U.S. branches and agencies of foreign banks that tightened terms on C&I loans generally declined but remained elevated. The percentage of foreign institutions that raised premiums on riskier loans decreased from 75 percent in January to 52 percent in the current survey, and the fraction of foreign banks that strengthened loan covenants declined from 52 percent to 43 percent over the same period. The one exception was the percentage of foreign institutions that increased the costs of credit lines, which moved up noticeably from 35 percent in the previous survey to 57 percent in April.

A significant percentage of banks that tightened standards or terms on C&I loans over the past three months pointed to a reduced tolerance for risk as a reason for doing so and continued to voice concerns about the economic outlook. In the current survey, three�quarters of domestic and foreign respondents cited reduced tolerance for risk as a reason for tightening their lending policies, about the same fraction as in January. About 70 percent of domestic banks also indicated that a less favorable or more uncertain economic outlook was a reason for changing their standards and terms over the past three months. While still high, this fraction represents a marked decline from the January survey in which all but one domestic bank indicated that this was at least a somewhat important reason for tightening their lending policies. Furthermore, only 10 percent of domestic respondents in the current survey noted that a less favorable or more uncertain economic outlook was a “very important” reason, down from 40 percent in the January survey.

About one�third of domestic banks, on net, reported weaker demand for C&I loans from both large and small firms over the past three months, down from roughly one�half in the January survey. Every domestic bank that experienced weaker demand reported that a decline in customers needs for bank loans to finance capital expenditures was at least a somewhat important reason for the weakness in demand, and more than one�third of respondents indicated that this reason was “very important.” As in the January survey, banks also reported weaker demand for loans to finance mergers and acquisitions, inventories, and accounts receivable. Out of eight banks that reported an increase in demand for C&I loans, six of them indicated that the increase was due to a shift in borrowing from other bank or nonbank credit sources that became less attractive, likely, at least in part, a reflection of the recent pressures in the market for commercial paper. The same number of banks identified a decline in customers internally generated funds as a reason for higher C&I loan demand. The net percentage of foreign branches and agencies reporting weaker demand for C&I loans fell from nearly 50 percent in January to 14 percent in the current survey. The most frequently cited reason for weaker demand at foreign institutions was a decline in requests for merger and acquisition financing.

Commercial paper backup lines of credit. A series of special questions was aimed at changes in banks' policies with regard to commercial paper backup lines of credit over the past twelve months. Forty�six of the largest domestic banks and nineteen foreign institutions indicated that they provide these facilities on a regular basis.¹ Domestic banks accounting for more than one�third of respondents' total lending facilities—defined as the sum of C&I loans and unused commitments—tightened standards on commercial paper backup lines of credit for nonfinancial firms with A1/P1 commercial paper ratings over the past year; domestic institutions accounting for about 60 percent of total lending facilities indicated doing so for firms with A2/P2 ratings. The (unweighted) fraction of foreign institutions that had tightened standards on commercial paper backup lines of credit for nonfinancial firms with an A1/P1 commercial paper rating over the past twelve months stood at 60 percent, while almost 90 percent reported doing so for lower�rated borrowers.

Domestic banks accounting for more than 90 percent of total lending facilities indicated that they had increased fees and raised spreads associated with commercial paper backup lines of credit for commercial paper issuers with both A1/P1 and A2/P2 ratings. Virtually all of the banks pointed to heightened concerns about possible deterioration in issuers credit quality and a higher probability of lines being drawn because of less certain conditions in the commercial paper market as reasons for tightening standards and terms. Over the past twelve months, about 10 percent of domestic banks (weighted) and 10 percent of foreign institutions (unweighted), on net, reported stronger demand for commercial paper backup lines of credit from nonfinancial issuers with both A1/P1 and A2/P2 ratings.

Commercial real estate lending. The net fraction of domestic banks that reported tighter standards on commercial real estate loans over the past three months declined from 46 percent in January to 30 percent in the current survey. At branches and agencies of foreign banks, the net percentage reporting tighter standards on commercial real estate loans remained stable at about 20 percent. In the current survey, more than 30 percent of domestic respondents, on net, noted that demand for commercial real estate loans had weakened, down from 43 percent in January; among foreign institutions, 25 percent, on net, reported weaker demand for this type of loan over the past three months.

A set of special questions addressed how the lack of insurance against terrorism has affected commercial real estate lending. About 70 percent of domestic respondents indicated that less than 5 percent of the dollar volume of their commercial real estate loans outstanding—either held on their books or securitized—is backed by “high profile” or “heavy traffic” commercial real estate properties.² For about one�fifth of banks, loans financing such properties make up between 5 percent and 10 percent of their commercial real estate loan portfolio, while for the remainder, these loans account for between 10 percent and 20 percent of commercial real estate loans outstanding. At foreign institutions, loans backed by high profile properties account for somewhat larger shares of the respondents commercial real estate portfolios.

Almost three-quarters of domestic banks indicated that they require terrorism insurance on less than 10 percent of loans financing high profile or heavy traffic commercial real estate properties. Indeed, in their comments, a number of banks noted that their standard commercial real estate loan contracts—especially for smaller loans (less than $10 million)—generally do not require terrorism insurance. However, six domestic and six foreign respondents that answered these special questions reported that they require insurance against terrorism on more than 90 percent of loans financing such properties. As of the end of 2002:Q1, these six domestic banks accounted for about 8 percent of all commercial real estate loans in the United States, while the six foreign institutions accounted for less than 2 percent of all commercial real estate loans.

Domestic respondents indicated that if coverage was required and an existing borrower was unable to secure adequate insurance against terrorism for a high profile or heavy traffic commercial real estate property, their most likely response would be to ask for additional collateral and to modify the existing loan covenants to allow for partial coverage. The foreign institutions, by contrast, noted that their most likely course of action would be to increase fees or interest rates associated with the loan, and four foreign respondents indicated that they would be very likely to call the loan or refuse to roll it over when it comes due.

Among domestic banks that received applications for loans to finance high profile commercial real estate properties since the events of September 11, 90 percent indicated that their rejection rate on these loan applications has stayed about the same. Sixty percent of U.S. branches and agencies of foreign banks that received applications for loans to finance these types of properties reported their rejection rate as essentially unchanged. Almost 80 percent of domestic banks and more than 70 percent of foreign institutions indicated that they experienced little or no change in demand for loans to finance high profile and heavy traffic properties because potential borrowers were unable to secure affordable insurance against acts of terrorism. Seven domestic banks reported moderately weaker demand and four domestic and three foreign institutions experienced substantially weaker demand for loans to finance such properties because of issues related to terrorism insurance.


Lending to Households
(Table 1, questions 18-25)

Domestic banks credit standards for approving residential mortgage loans were largely unchanged over the past three months, with only one bank reporting that it had tightened lending standards somewhat, the same as in the January survey. On net, about 6 percent of domestic respondents reported increased demand for residential mortgages, down from 30 percent in January.

In the current survey, less than 10 percent of banks indicated that they had tightened standards on credit card loans over the past three months, a somewhat smaller percentage than in January; terms and conditions on existing credit card accounts were largely unchanged. For other types of consumer loans, one�fifth of banks reported that they had tightened standards over the past three months, about the same percentage as in the January survey. Almost one�quarter of domestic banks raised the minimum required credit score on consumer loans other than credit card loans, and 15 percent reduced the number of exceptions granted to customers not meeting credit�scoring thresholds. On net, banks reported demand for consumer loans as about unchanged over the past three months.

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

Charts (11.8 KB PDF)
Measures of lending practices from current and previous surveys
Chart data (ASCII)

Table 1 (31.8 KB PDF)
Summary of responses from U.S. banks

Table 2 (21.5 KB PDF)
Summary of responses from branches and agencies of foreign banks

Full report (159 KB PDF)