FRB: Senior Loan Officer Opinion Survey: October 2010

October 2010

The October 2010 Senior Loan Officer Opinion Survey on Bank Lending Practices

The October 2010 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 included a set of special questions that asked respondents about factors affecting recent commercial and industrial (C&I) loan growth and a special question that asked respondents about long-term changes in lending standards. This summary is based on responses from 57 domestic banks and 22 U.S. branches and agencies of foreign banks.¹

The October survey indicated that, on net, banks eased standards and terms over the previous three months on some categories of loans to households and businesses.² Both large and other domestic banks reported having eased some standards and terms; large banks were primarily responsible for the easing reported in July.³ However, substantial fractions of banks reported in response to a set of special questions that standards for many categories of loans would not return to their longer-run averages for the foreseeable future.

Domestic survey respondents reported easing standards and most terms on C&I loans to firms of all sizes. As in the April and July surveys, banks mainly pointed to a more favorable or less uncertain economic outlook and increased competition from other banks or nonbank lenders as reasons for easing. Of the few banks that reported having tightened standards or terms, all reported a reduced tolerance for risk as being partly responsible for the tightening.

Changes in standards and terms on loans to households were somewhat more mixed. Banks again reported an increased willingness to make consumer installment loans, and a small net fraction of respondents reported easing standards for approving credit card applications. However, a few banks, on net, reported having tightened terms and reduced the size of credit lines on existing credit card accounts. Small net fractions of respondents--though not the largest respondents--also reported having tightened standards on prime and on nontraditional mortgage loans as well as standards for approving home equity lines of credit (HELOCs).

Demand declined, on net, for C&I loans, particularly for small firms; demand for C&I loans had been unchanged in the July survey.⁴ Large banks reported increased demand for commercial real estate (CRE) loans, but demand weakened at other banks. In addition, small net fractions of banks reported decreased demand for all types of residential mortgages and consumer loans, though the weakness was primarily at smaller institutions.

Business Lending
(Table 1, questions 1-10, 21 Table 2, questions 1-11)

Questions on commercial and industrial lending. The October survey showed that a modest net fraction of domestic respondents had eased standards on C&I loans to large and middle-market firms and to small firms over the previous three months--the fourth and second consecutive surveys, respectively, showing such an easing. Only two domestic banks reported having tightened standards on C&I loans. Standards at branches and agencies of foreign banks had been eased slightly on net.

For the second consecutive survey, banks reported having eased terms on C&I loans, with moderate net fractions of domestic banks reporting that they had reduced spreads of loan rates over their bank's cost of funds and had reduced the costs of credit lines. Small to moderate net fractions of large domestic banks and of foreign institutions eased each of the seven survey loan terms for firms of all sizes. Other domestic banks reported a net easing of the spread of loan rates over their own cost of funds and of the costs of credit lines, but small net fractions of those banks reported having increased collateralization requirements and tightened loan covenants. Domestic banks again reported little change in the size of existing credit lines for commercial and industrial firms and business credit card accounts.

Most of the respondents that eased standards or terms on C&I loans cited a more favorable or less uncertain economic outlook and increased competition from other banks and nonbank lenders as important reasons for doing so. Of the relatively small number of banks that tightened standards or terms, most cited as important reasons for the change a reduced tolerance for risk; a less favorable or more uncertain economic outlook; or increased concerns about the effects of legislative changes, supervisory actions, or changes in accounting standards. Some also cited a deterioration in their current or expected liquidity or capital positions as an important reason.

A modest net fraction of domestic banks reported weaker demand for C&I loans from large and middle-market firms over the previous three months, while a somewhat larger net fraction reported weaker demand from small firms. In the July survey, demand had been about unchanged. The majority of banks reporting weaker demand cited reduced financing needs by their customers for inventories and for accounts receivable, reduced investment in plant and equipment, and increases in internally generated funds as reasons for the decrease in demand. However, in a sign that demand might pick up, the number of inquiries regarding new or increased lines of credit continued to rise. A moderate net fraction of foreign institutions reported stronger demand for C&I loans.

Special questions on factors affecting recent C&I loan growth. A set of special questions asked respondents about factors affecting recent C&I loan growth. According to the Federal Reserve's weekly H.8 statistical release, "Assets and Liabilities of Commercial Banks in the United States," C&I loans fell significantly less rapidly in the third quarter of 2010 than they had in the first two quarters of the year, and large domestic banks were principally responsible for this moderation in the runoff of C&I loans. On the whole, the survey answers help explain this recent pattern. First, a moderate net fraction of respondents indicated that originations of new syndicated or club loans (large loans originated by a group of relationship lenders) have picked up somewhat over the past three months. Such lending activity is concentrated at larger banks. Second, a somewhat smaller net fraction reported increased new originations of other loans to large and middle-market firms, with much of the increase accounted for by large banks. Other factors that were reported to have contributed to the reduction in the runoff of C&I loans included decreases in charge-offs and a modest net fraction of banks that reported an increase in maturing term loans that were rolled over or extended rather than paid off.

In contrast, a small net fraction of banks reported that loans to small firms had decreased over the past three months. Drawdowns on existing credit lines also reportedly had fallen on net, a decline that was somewhat more pronounced among foreign respondents. On net, survey respondents indicated that early paydowns of C&I loans were basically unchanged over the past three months.

Questions on commercial real estate lending. Most respondents reported no change in their bank's standards for approving CRE loans. As in the July survey, a small net percentage of banks reported that they had tightened standards for such loans; two large banks reported having eased standards, while four other banks reported having tightened them. Similarly, domestic banks reported little change in demand for CRE loans, on net, but the banks reporting stronger demand were among the larger respondents in the sample, while those reporting weaker demand tended to be smaller. A modest net fraction of foreign institutions also reported stronger demand for CRE loans.

Lending to Households
(Table 1, questions 11-20)

Questions on residential real estate lending. On net, small fractions of domestic banks reported having tightened standards on both prime and nontraditional mortgage loans, marking a reversal from the slight net easing reported in the July survey for prime loans. The tightening of standards on prime mortgage loans was largely accounted for by smaller banks; large banks, on net, left standards about unchanged. Both large and other banks reported a net tightening of standards on nontraditional mortgage loans. Continuing a pattern seen since the start of the financial crisis, fewer than half of the respondents reported having made such loans. Modest net fractions of banks reported weakening demand for both prime and nontraditional mortgage loans to purchase homes.

A modest net fraction of banks reported that standards for approving HELOCs had tightened over the past three months. As with prime residential mortgage loans, that tightening in standards was largely accounted for by smaller banks. A small net fraction of respondents also reported having reduced the size of HELOCs for existing customers. On net, banks reported a slight weakening in demand for HELOCs.

Questions on consumer lending. The net fraction of respondents reporting an increased willingness to make consumer installment loans ticked down to about 20 percent in the October survey. Standards for approving applications for consumer loans other than credit card loans were about unchanged, while terms on such loans were either unchanged or eased slightly.

A moderate net fraction of banks reported having eased credit standards for approving applications for credit cards from individuals or households, with large banks accounting for all of the easing. However, small net fractions of banks reported having tightened spreads of interest rates on credit cards over their cost of funds and reduced the size of credit lines on existing credit card accounts.

A small net fraction of banks reported a weakening in demand for consumer loans of all types. A modest net percentage of large banks reported an increase in demand for the third consecutive quarter, but a larger net percentage of other banks reported a decrease in such demand.

Special Question on Long-term Changes in Lending Standards
(Table 1, question 22; Table 2, question 12)

Another special question asked banks whether their current level of lending standards remained tighter than the average level over the past decade and, if so, when they expected that standards would return to their long-run norms, assuming that economic activity progressed according to consensus forecasts. For all loan categories, substantial fractions of respondents thought that their bank's lending standards would not return to their long-run norms until after 2012 or would remain tighter than longer-run average levels for the foreseeable future: between 25 and 35 percent for C&I loans to various size classes of borrower, between 50 and 75 percent for CRE and residential real estate loans, and between 35 and 70 percent for credit card and other consumer loans. Conversely, nearly half of the respondents thought that standards on C&I loans would return to their longer-run norms by the end of 2012, and about 40 percent of respondents thought that the same would be true for residential mortgages and credit card loans to prime household borrowers. Moderate fractions of respondents indicated that their bank's current level of lending standards was not tighter than its average level over the past decade.

¹Banks received the survey on or after October 5, 2010, and responses were due by October 19, 2010. Return to text

²For questions that ask about lending standards or terms, reported net percentages equal the percentage of banks that reported having tightened standards ("tightened considerably" or "tightened somewhat") minus the percentage of banks that reported having eased standards ("eased considerably" or "eased somewhat"). For questions that ask about demand, reported net fractions equal the percentage of banks that reported stronger demand ("substantially stronger" or "moderately stronger") minus the percentage of banks that reported weaker demand ("substantially weaker" or "moderately weaker"). Return to text

³Large banks are defined as banks with assets greater than or equal to $20 billion as of June 30, 2010. Return to text

⁴Small firms are generally defined as firms with annual sales of less than $50 million. Return to text

This document was prepared by John C. Driscoll and Francisco Covas with the assistance of Ben Rump, Division of Monetary Affairs, Board of Governors of the Federal Reserve System.