The October 2005 Senior Loan Officer Opinion Survey
on Bank Lending Practices

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Table 1 | Table 2 | Chart data
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The October 2005 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 contained special questions on longer-term changes in terms on mortgage loans to purchase homes. The survey also asked banks about changes in lending standards and terms on home equity lines of credit in light of a supervisory letter issued by federal bank regulators in May 2005. Finally, banks were queried about anticipated changes in the supply of, and demand for, loans to businesses and households stemming from the recently enacted bankruptcy reform legislation. This article is based on responses from fifty-seven domestic banks and nineteen foreign banking institutions

Domestic commercial banks reported a further net easing of lending standards and terms for commercial and industrial (C&I) loans over the past three months, while lending standards for commercial real estate loans had changed little. At U.S. branches and agencies of foreign banks, lending standards and terms for both types of loans were about unchanged over the same period. Small net fractions of domestic banks noted stronger demand for both C&I and commercial real estate loans in the October survey. At foreign institutions, a few respondents indicated that demand for C&I loans had picked up, while demand for commercial real estate loans was unchanged. Significant net fractions of domestic respondents reported weaker demand for mortgages to purchase homes as well as weaker demand for consumer loans over the past three months. On net, credit standards on residential mortgages and consumer loans were little changed in October.

In response to the special question about changes in terms on mortgage loans to purchase homes, notable net fractions of domestic institutions reported that over the past two years they had eased a number of terms, including the maximum size of primary and second mortgages, spreads of mortgage rates over an appropriate market base rate, and the maximum loan-to-value ratio. Turning to home equity lines of credit, only a few domestic banks reported having tightened their lending policies in response to concerns expressed in a supervisory letter distributed last spring. Finally, in response to special questions on changes in the supply of, and demand for, loans to businesses and households in light of the new bankruptcy law, nearly all domestic and foreign institutions noted that they had not changed their business and household lending policies. Moreover, the new bankruptcy law is generally expected to have no effect on the demand for credit from existing customers. However, a considerable number of domestic banks, on net, reported that they expect credit losses on new loans to businesses and households to be moderately lower as a result of the new bankruptcy law.

C&I Lending
(Table 1, questions 1-6; Table 2, questions 1-6) 

On balance, the October survey pointed to some further easing of business lending standards and terms and continued strengthening of loan demand. However, the pace of these changes generally had slowed relative to recent surveys.

In the October survey, domestic banks indicated that they had further eased standards and terms on C&I loans over the past three months. Nearly 10 percent of respondents, on net, reported having eased their credit standards on loans to large and middle-market firms, a somewhat smaller net fraction than in recent surveys. Almost one-half of domestic institutions--roughly the same net fraction as in the July survey--indicated that they had trimmed spreads of loan rates over their cost of funds for such firms. About 30 percent of domestic respondents--a smaller net percentage than in the previous survey--reported that they had reduced the costs of credit lines in October. Domestic respondents also indicated that they had eased other lending terms to large and middle-market firms, on net, over the same period: About one-fifth of banks reported that they increased the maximum size and maturity of loans or credit lines and eased covenants on such loans. For C&I loans to small firms, only a few domestic respondents indicated that they had eased lending standards, but almost 40 percent of them, on net, noted that they had trimmed spreads of loan rates over their cost of funds. U.S. branches and agencies of foreign banks said that their standards on C&I loans were essentially unchanged over the past three months. However, a moderate net fraction of these institutions reported having eased terms on C&I loans.

As in recent surveys, almost all domestic banks that reported having eased their lending standards and terms in the October survey cited more-aggressive competition from other banks or nonbank lenders as an important reason for doing so. A substantial percentage of respondents also pointed to an increased tolerance for risk as a reason for having eased standards or terms on C&I loans.

On net, 15 percent of domestic banks reported an increase in demand for C&I loans from large and middle-market firms over the past three months, a considerable reduction from the 40 percent that did so in the previous survey. Similarly, the net fraction of respondents reporting stronger demand from small firms fell back from its level in the July survey. At U.S. branches and agencies of foreign banks, only a few respondents noted that demand for C&I loans was moderately stronger over the past three months. Among the domestic respondents that experienced stronger demand for C&I loans, most cited borrowers' increased financing needs for accounts receivable and inventories. A significant proportion of these respondents also pointed to a rise in merger and acquisition activity and increased financing needs for investment in plant and equipment. Regarding future business, about 15 percent of domestic and 25 percent of foreign institutions, on net, indicated that inquiries from potential business borrowers had increased over the past three months.

Commercial Real Estate Lending
(Table 1, questions 7-8; Table 2, questions 7-8)

Domestic and foreign institutions reported little change in lending standards on commercial real estate loans in the current survey. On net, 12 percent of domestic banks saw an increase in demand for commercial real estate loans over the past three months, down from one-fourth over the three months ending in July. Foreign institutions indicated that demand for this type of loan was unchanged in October, down from 15 percent reporting stronger demand in the previous survey.

Lending to Households
(Table 1, questions 9-18) 

Credit standards on residential mortgage loans were little changed in the October survey. Demand for mortgages to purchase homes--which banks had reported as having risen in the July survey--weakened over the past three months: Almost one-fourth of domestic institutions reported a decline in demand. However, this decline may reflect, in part, lower refinancing activity in recent months, a source of demand some respondents may find difficult to separate from mortgage demand to purchase homes.

The survey contained two special questions on residential real estate loans: The first question asked domestic banks about changes over the past two years in various terms on mortgage loans to purchase homes; the second queried domestic banks about changes in lending standards and terms for home equity lines of credit in light of a May 2005 supervisory letter regarding the appropriate management of the risk posed by such loans.¹

Almost 40 percent of domestic banks, on net, reported that over the past two years they had increased the maximum size of primary mortgages they were willing to provide, while about 30 percent, on net, indicated that over the same period they had increased the maximum size of second mortgages. In addition, about one-fourth of respondents, on net, said that they had narrowed spreads of mortgage rates over an appropriate market base rate and had increased the maximum loan-to-value ratio on such loans. By contrast, banks noted that the maximum length of extended interest-rate locks, minimum required credit scores, and loan origination fees were little changed over the past two years.

In response to the supervisory letter, most domestic institutions indicated that they had not changed their lending standards or terms on home equity lines of credit. Only five banks reported having tightened price-related terms and only a few banks reported having tightened their non-price-related terms and credit standards on such facilities.

Domestic institutions indicated that their willingness to make consumer installment loans was about unchanged over the past three months. On net, standards and terms on credit card and non-credit-card consumer loans were about flat in the October survey. After strengthening over the previous three months, demand for consumer loans reportedly weakened over the past three months: About 20 percent of domestic banks, on net, saw weaker demand for such loans.

Special Questions on Bankruptcy Reform Legislation
(Table 1, questions 19-21; Table 2, questions 9-11)

This set of special questions addressed the expected effect of bankruptcy reform legislation (which took effect on October 17, 2005) on the supply of, and demand for, loans to businesses and households.² Virtually all domestic and foreign respondents noted that the new law had had no effect on their business and household lending policies. In addition, all foreign and nearly all domestic institutions reported that, after accounting for changes in standards and terms, the new bankruptcy law would likely have no effect on the demand for credit from existing customers. Finally, almost one-third of domestic institutions, on net, indicated that, after accounting for changes in standards and terms and assuming economic activity progresses in line with consensus forecasts, credit losses on new loans to households are expected to be moderately lower as a result of the changes. About 15 percent of domestic respondents, on net, noted that credit losses on new loans to businesses are anticipated to be lower. By contrast, foreign institutions indicated that they expect the bankruptcy law changes to have no effect on credit losses on new loans to businesses.

¹ The supervisory letter is available on the Board's public website: http://www.federalreserve.gov/boarddocs/srletters/2005/sr0511.htm

² This legislation, known as the Bankruptcy Abuse Prevention and Consumer Protection Act, was passed by the Congress in March and signed into law by the President on April 20, 2005. The legislation makes bankruptcy a less attractive option for some businesses and households.