Senior Loan Officer Opinion Survey on
Bank Lending Practices

The April 2003 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. In addition, the survey contained two sets of supplementary questions that focused on the reasons for recent changes in the credit quality of business and commercial real estate loans, as well as changes in lending terms for commercial real estate loans. Responses were received from fifty-six domestic and eighteen foreign banking institutions.

On net, both foreign and domestic banks continued to report that they had tightened business lending conditions in the April survey. However, the fractions of domestic banks that tightened lending standards and terms on C&I loans declined noticeably. On the household side, the fractions of banks that tightened standards on credit cards and other consumer loans remained modest and within the narrow range of recent surveys. Banks reported that demand for C&I and commercial real estate loans weakened, on net, over the past three months, while demand for residential mortgages continued to increase.

Lending to Businesses

(Table 1, questions 1-14; Table 2, questions 1-14)

Only six domestic banks tightened lending standards to large and middle-market firms in April, and one bank reported that it had eased lending standards to those firms the most recent survey. This represents a significant difference from the January survey, when about 20 percent of domestic banks reported having tightened standards on C&I loans to larger firms, and three of the banks that had tightened lending standards classified the tightening as considerable. Indeed, the net percentage of banks reporting tighter lending standards for large and middle market firms in April, 9 percent, was the lowest percentage since the November 1999 survey.

Furthermore, the net fraction of domestic banks that reported increasing spreads on loans to larger borrowers fell from 27 percent in January to 15 percent in April. Moreover, the number of banks that reported reducing those spreads rose to seven in April from only two in the previous survey. The net fraction of domestic banks that strengthened loan covenants also fell, to 18 percent in April from 27 percent in January. The net shares of banks that reported tightening other loan terms was about unchanged from the previous survey, including the fraction of banks that reported increasing premiums on riskier loans, which stayed at just over one-third.

The percentage of domestic banks that reported tightening standards for small firms remained within its recent range in April, at 13 percent. The percentages of banks tightening terms on loans to small firms, which already had been notably lower than those for large and middle-market firms, moved down somewhat further. Indeed, almost equal fractions of banks lowered the cost of credit lines for small firms as raised them, and the net fraction of banks that increased spreads on loans to these firms fell from 16 percent in January to 11 percent in April. In addition, the net fraction of banks that increased premiums charged on riskier loans to small firms fell from 35 percent in January to 19 percent in April.

All but one of the domestic banks that had tightened standards or terms cited a less favorable economic outlook as at least a somewhat important reason for doing so. Large majorities of those banks also continued to cite a reduced tolerance for risk and worsening industry-specific problems as important reasons for the change. All ten of the banks that reported having eased standards or at least one loan term said they had done so in response to increased competition from other banks or nonbank lenders, which is consistent with a substantial amount of institutional participation in the syndicated loan market during the first quarter of 2003. One bank that eased lending conditions indicated that a more favorable economic outlook had played a role in its decision.

The fraction of U.S. branches and agencies of foreign banks that tightened standards on C&I loans, which had been trending down since last August, was one-third in the current survey, about unchanged from January. The fraction of foreign institutions that increased spreads on all loans over their cost of funds was also steady, at just below 50 percent for the second consecutive survey. The fraction of branches and agencies that tightened most other terms inched down, except the fraction that boosted premiums on loans to riskier customers, which rose to more than 50 percent in April from about 40 percent in January. Foreign institutions that tightened standards or terms generally pointed to a less favorable economic outlook as the most important reason for tightening.

The net fractions of domestic banks reporting weaker demand rose in April. About 40 percent of domestic banks reported weaker demand for loans from large and medium-size firms over the past three months, and no bank reported increased demand from those customers. For small firms, the net percentage of banks reporting weaker demand remained at about 20 percent, with only three banks reporting increased demand. The net share of branches and agencies of foreign banks reporting weaker demand more than doubled to 44 percent in April from 20 percent in January.

As in previous surveys, almost all domestic banks that experienced weaker loan demand reported that a decline in customers' need for bank loans to finance capital expenditures was at least a somewhat important reason, and reduced needs to finance inventories was the second most cited reason. Large fractions of domestic banks also blamed reduced merger and acquisition business and reduced need to finance accounts receivable for weaker demand. The most frequently cited reasons for weaker loan demand at branches and agencies of foreign banks continued to be a decline in merger and acquisition activity and reduced customer investment in plant and equipment.

Credit Quality of Business Loans. Over the past several quarters, delinquency rates on C&I loans at commercial banks have leveled off, while charge-off rates have remained very high. Almost all of the domestic banks indicated that delinquency rates had stabilized because reduced interest rates have allowed borrowers to lower their debt-servicing costs by refinancing loans and restructuring their balance sheets. Foreign banking institutions also pointed to refinancing at lower interest rates, but reported that a reduction in industry-specific problems had played a somewhat greater role, on net, in stabilizing their delinquency rates. Both domestic and foreign banks also credited the aggressive tightening of lending standards over the past several years for reducing the incidence of new problem loans. Large fractions of banks reported a variety of reasons for elevated charge-off rates, including unusually low recovery rates on delinquent loans and their own aggressiveness in dealing with problem credits.

Commercial real estate lending. The net fraction of domestic banks that reported tightening standards on commercial real estate loans over the past three months was 18 percent in April-well within its recent range. Two of ten foreign institutions reported tightening standards for these loans in the current survey, up from zero in the January survey. Demand for these loans continued to weaken at domestic banks, where the net share of banks reporting weaker demand edged up from 21 percent in January to 29 percent in April. On net, demand at foreign institutions was unchanged.

Moderate fractions of domestic and foreign banks indicated that over the past year they had tightened various lending terms associated with commercial real estate loans; however, the fractions were generally lower than they were when the same questions were asked in January 2002. For instance, about 25 percent of domestic banks reported that they had raised loan-to-value ratios over the past twelve months, down from almost 50 percent in the year-earlier survey. As was the case for C&I loans, banks most commonly cited concern about the economy as a reason for tightening terms, and also specifically pointed to conditions in the commercial real estate sector. Among the eleven domestic banks that had eased commercial real estate lending terms during the past year, almost all cited more aggressive competition from other commercial banks as the reason for doing so, and a majority also reported increased competition from nonbank lenders.

Despite rising vacancy rates and falling rents for commercial office space over the past several years, the delinquency rate on commercial real estate loans at banks declined steadily during 2002. Most banks reported that less than half of their commercial real estate loans contain prepayment penalties, and therefore borrowers had been able to avoid delinquencies by refinancing their loans at lower interest rates to reduce their debt-servicing costs. Banks also indicated that many borrowers still have considerable equity in their properties, which maintains the incentive for them to continue payments. Some foreign and domestic institutions also reported that long-term leases that had insulated property owners from declining rents were a very important reason for the good performance of commercial real estate loans.

Lending to Households

(Table 1, questions 15-22)

Only 6 percent of domestic banks reported that they had tightened standards on residential mortgage loans in the April survey, down from about 10 percent in both the January and the October surveys. The net fraction of respondents that reported stronger demand for mortgages to purchase homes over the past three months edged up to 17 percent in April from 8 percent in January, but remains well below the levels that prevailed in 2002.

The shares of banks that reported tightening standards for credit cards and other consumer loans remained within their narrow ranges of the past two years at 10 and 13 percent, respectively. About 10 percent of banks, on net, indicated that they had increased the minimum credit score required for both credit card and other consumer loans. Banks also reported that they had reduced the extent to which loans were granted to customers that did not meet those thresholds, especially for non-credit-card consumer loans. By contrast, banks reduced, on net, the spread of loan rates over their cost of funds for both credit card and other types of consumer loans, and a few also extended the maximum maturity for installment loans. On net, banks reported that demand for consumer loans was about unchanged.

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

Charts (12.9 KB PDF)
Measures of lending practices from current and previous surveys
Chart data (ASCII)

Table 1 (25.6 KB PDF)
Summary of responses from U.S. banks

Table 2 (16.6 KB PDF)
Summary of responses from branches and agencies of foreign banks

Full report (60.7 KB PDF)