July 2007

The July 2007 Senior Loan Officer Opinion Survey
on Bank Lending Practices

The July 2007 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.¹ The survey contained a set of special questions that asked banks about their involvement in, and their assessment of the outlook for, the syndicated loan market. As in the April survey, banks were queried separately about changes in standards and demand for prime, nontraditional, and subprime residential mortgages. This article is based on responses from fifty-three domestic banks and twenty foreign banking institutions.

Both domestic and foreign institutions indicated that they had eased terms on commercial and industrial (C&I) loans over the past three months, while a small net fraction of banks reported having tightened credit standards on such loans over the same period. Respondents also noted in the July survey that they had tightened standards on commercial real estate loans. Regarding the demand for business loans, a moderate net fraction of domestic institutions reported weaker demand for C&I loans over the past three months. Branches and agencies of foreign institutions, by contrast, experienced stronger demand for such loans, on balance, over the same period. Both domestic and foreign institutions noted that the demand for commercial real estate loans had weakened, on net, since April.

With regard to loans to households, a small net fraction of domestic institutions reported having tightened lending standards on prime residential mortgages over the past three months, whereas considerable net fractions of these respondents indicated that they had further tightened lending standards on nontraditional and subprime mortgage loans. Moderate fractions of domestic banks, on balance, reportedly experienced weaker demand for prime and nontraditional residential mortgages over the past three months, but a notable net fraction of banks reported that they had seen weaker demand for subprime residential mortgages over the same period. A significant net percentage of domestic banks also reported weaker demand for consumer loans over the past three months.

C&I Lending

(Table 1, questions 1–6; Table 2, questions 1–6)

In the July survey, small net fractions of domestic institutions reported that they had tightened lending standards on C&I loans to large and middle-market firms and to small firms over the past three months. However, these respondents noted that they had further eased some terms on C&I loans over the same period. About one-third of respondents—a smaller net fraction than in the April survey—indicated that they had trimmed spreads of loan rates over their cost of funds for firms of all sizes over the previous three months. Smaller net fractions reported that they had reduced the costs of credit lines and eased loan covenants to large and middle-market firms, and had reduced the costs of credit lines and lowered premiums charged on riskier loans to small firms.

Fifteen percent of U.S. branches and agencies of foreign banks reported that they had tightened credit standards on C&I loans during the survey period. Foreign institutions reported small mixed changes in C&I loan terms—a modest net fraction indicated that they had increased the maximum size of credit lines, whereas a small net percentage reported that they had increased premiums charged on riskier loans.

Nearly all domestic banks and all U.S. branches and agencies of foreign banks that reported having eased their lending standards or terms in the July survey pointed to more-aggressive competition from other banks or nonbank lenders as the most important reason for having done so. Institutions that reportedly moved to a more stringent lending posture, in contrast, cited a less favorable or more uncertain economic outlook, a reduced tolerance for risk, and decreased liquidity in the secondary market for C&I loans as the most important reasons for the changes in their lending policies.

The net fraction of domestic banks that reported weaker demand for C&I loans over the past three months changed little relative to the April survey. On balance, about one-fifth of domestic banks noted that they had experienced weaker demand for C&I loans from large and middle-market firms, and around 10 percent reported that they had experienced weaker demand from small firms. The most frequently cited reasons for weaker demand at domestic banks were borrowers’ decreased need to finance inventories or investment in plant or equipment, or that customer borrowing shifted to other bank or nonbank credit sources. By contrast, one-fifth of U.S. branches and agencies of foreign banks reported stronger demand for C&I loans over the past three months. Domestic and foreign institutions that reported an increase in demand for C&I loans mainly pointed to customers’ greater financing needs related to merger and acquisition (M&A) activity as the most important reason for the rise in loan demand.

Regarding future business, about 15 percent of domestic respondents, on net, reported that the number of inquiries from potential business borrowers had decreased over the previous three months, a somewhat larger fraction than in the April survey. On balance, foreign respondents indicated that the number of inquiries from potential business borrowers was unchanged over the past three months.

Special Questions on the Syndicated Loan Market

(Table 1, questions 7–12; Table 2, questions 7–12)

The July survey included a set of special questions regarding banks’ involvement in, and their assessment of the outlook for, the syndicated loan market.² In general, syndicated loans accounted for a modest fraction of C&I loans on domestic banks’ books, although the share was substantial for some banks. In addition, the reported fractions of syndicated loans on these banks’ books generally did not appear to be related to the overall size of their C&I loan portfolios. About one-fourth of the domestic institutions noted that syndicated loans accounted for less than 5 percent of the C&I loans on their bank’s books;³ around one-half reported that this fraction was between 5 percent and 20 percent; and about one-fifth indicated that this share was between 20 percent and 50 percent. Four domestic respondents noted that syndicated loans accounted for a substantial percentage of all C&I loans on their bank’s books: One institution indicated that this fraction was between 50 percent and 75 percent, whereas three institutions reported that this share was more than 75 percent. These four institutions accounted for less than 10 percent of all C&I loans on the books of the domestic banks that responded to this special question.

Syndicated loans generally accounted for a larger fraction of C&I loans on foreign respondents’ books, compared with their domestic counterparts. Of the twenty foreign institutions that responded to this question, four of them noted that syndicated loans accounted for between 35 percent and 50 percent of their C&I loan portfolios; six institutions indicated that this share was between 50 percent and 75 percent; and nine institutions reported that this fraction was more than 75 percent. One relatively small foreign respondent noted that syndicated loans accounted for between 5 percent and 20 percent of its C&I loans. As was the case for the domestic institutions, the shares of syndicated loans reported by the foreign banks did not appear to be related to the overall size of the foreign banks’ C&I loan portfolios.

Most domestic and foreign institutions reported in the July survey that leveraged syndicated loans generally accounted for a modest fraction of the syndicated loans on their books.⁴ Of the domestic banks, about one-half reported that leveraged syndicated credits accounted for less than 5 percent of the syndicated loans on their books; approximately 40 percent noted that this fraction was between 5 percent and 35 percent; and about one-tenth reported that leveraged syndicated loans made up between 35 percent and 75 percent of their syndicated loans. Regarding foreign respondents, about one-third reported that leveraged loans accounted for less than 5 percent of the syndicated loans on their books; one-third indicated a fraction of between 5 percent and 20 percent; and the remaining one-third noted a share of between 20 percent and 50 percent.

Survey participants were also asked to report the percentage of syndicated loans on their books that were originated to fund leveraged buyouts (LBOs). Both domestic and foreign respondents generally indicated that small fractions of the syndicated loans on their books were originated to finance LBOs. Of the domestic institutions, nearly two-thirds noted that LBO-related syndicated loans accounted for less than 5 percent of the syndicated loans on their books; around one-third reported that this share was between 5 percent and 35 percent; and around one-tenth noted that this fraction was between 35 percent and 75 percent. Of the foreign institutions, nearly two-thirds reported that LBO-related syndicated loans accounted for less than 5 percent of the syndicated loans on their books; about one-fifth noted that this share was between 5 percent and 35 percent; and around one-eighth reported that this fraction was between 35 percent and 75 percent.

Both domestic and foreign institutions reported that bridge loans and equity bridge loans generally accounted for very small fractions of the syndicated loans on their books.⁵ Of the domestic institutions, about one-half reported that they did not have any bridge loans on their books, and around 45 percent noted that bridge loans accounted for between 0 percent and 5 percent of their syndicated loan portfolios. About three-fourths of domestic respondents reported not having any equity bridge loans on their books, and about one-fourth noted that such loans accounted for between 0 percent and 5 percent of their syndicated loans. One domestic institution reported that bridge loans and equity bridge loans each accounted for between 5 percent and 20 percent of its syndicated loan portfolio.

Of the nineteen foreign respondents, five institutions indicated that they did not have any bridge loans on their books; twelve banks noted that bridge loans accounted for between 0 percent and 5 percent of their syndicated loans; and two institutions reported that bridge loans accounted for between 5 percent and 20 percent of their syndicated loans. Regarding equity bridge loans, about two-thirds of foreign institutions reported that they did not have any such loans on their books, whereas the remaining foreign banks noted that such loans accounted for between 0 percent and 5 percent of their syndicated loans.

Both domestic and foreign banks reportedly expected a tightening of credit standards and terms in the syndicated loan market in coming months, in part because of a very large number of deals in the pipeline. Indeed, about three-fourths of the domestic respondents and almost all foreign respondents expected tighter lending standards, an increased number of covenants or more stringent covenants, and wider loan rate spreads. Moreover, about two-fifths of the domestic respondents and approximately three-fifths of the foreign respondents expected a reduction in the size of the loan portions of financing deals and the introduction of call protection or original issue discounts on loan deals.

Commercial Real Estate Lending

(Table 1, questions 13–14; Table 2, questions 13–14)

Lending standards for commercial real estate loans were reportedly tightened further over the past three months: About one-fourth of domestic institutions—a slightly smaller net fraction than in the previous survey—and about 40 percent of foreign institutions indicated that they had tightened lending standards on commercial real estate loans in the July survey. Regarding demand, approximately one-fourth of domestic and foreign institutions reported that demand for commercial real estate loans had weakened over the past three months.

Lending to Households

(Table 1, questions 15–22)

As in the April survey, domestic banks were asked to report separately about changes in standards on, and demand for, prime, nontraditional, and subprime residential mortgages. In the July survey, banks indicated that they had tightened their lending standards on each of the three mortgage loan categories over the past three months, and the net fractions of banks that reported doing so in each case were roughly the same as in the April survey. About 14 percent of domestic banks tightened their lending standards on prime residential mortgages over the past three months.⁶ Of the forty-two institutions that reported having originated nontraditional residential mortgages, around 40 percent noted that they had tightened standards on these mortgage products.⁷ Of the sixteen institutions that reported having originated subprime residential mortgages, about 56 percent indicated that they had tightened standards on such loans.⁸

As in the April survey, tighter standards on subprime and nontraditional residential mortgage loans were not necessarily associated with more-stringent lending policies on prime residential mortgage loans. Indeed, only two of the nine institutions that reported having tightened standards on subprime mortgages over the past three months also indicated that they had tightened standards on prime mortgages, and six of the seventeen institutions that reportedly tightened standards on nontraditional mortgage loans noted that they also had tightened standards on prime mortgages.

Regarding demand for residential mortgages, 10 percent of respondents—a smaller net fraction than in the April survey—reported weaker demand for prime residential mortgage loans, and about 20 percent of respondents—around the same net fraction as in the April survey—experienced weaker demand for nontraditional residential mortgage loans. By contrast, about 44 percent of respondents—more than twice the net percentage reported in the April survey—reported weaker demand for subprime residential mortgages over the past three months.

On balance, domestic respondents’ willingness to make consumer installment loans and their lending standards for approving applications on credit card loans were little changed over the past three months. A small net fraction of banks reported having tightened lending standards on non-credit-card consumer loans over the same period. Some terms on both categories of consumer loans were tightened a bit during the survey period. On net, about one-eighth of the respondents reported having raised spreads of interest rates charged on outstanding credit card balances relative to their cost of funds, and about one-fourth of the respondents reported having reduced the extent to which consumer loans other than credit card loans were granted to customers who did not meet credit-scoring thresholds. The remaining terms on both types of consumer loans were reportedly little changed, on balance. Finally, about one-fifth of domestic respondents reported that they had experienced weaker demand for consumer loans of all types, about the same net fraction as in the April survey.

¹Banks received the survey in mid-July, and their responses were due July 26. Return to text

²The number of domestic banks that responded to these special questions varied from forty-seven to fifty-three depending on the question. According to Call Reports, these respondents accounted for between 64 percent and 67 percent of all C&I loans on the books of domestic commercial banks as of March 31, 2007. The number of foreign institutions that responded to these special questions varied from eighteen to twenty depending on the question. As of March 31, 2007, the foreign respondents accounted for about 55 percent of all C&I loans on the books of U.S. branches and agencies of foreign banks. Return to text

³Three relatively small banks reported that they do not currently have any syndicated loans on their books. Return to text

⁴In the survey, a loan was considered to be leveraged when the obligor's post financing leverage—as measured by ratios of debt-to-assets, debt-to-equity, cash flow-to-total debt, or other such standards unique to particular industries—significantly exceeded industry norms for leverage. Return to text

⁵In the survey, bridge loans were defined as M&A-related loans that banks expected to be paid down with funds raised in the capital markets within the next twelve months. Equity bridge loans were defined as loans that were originated to LBO sponsors to provide financing applied toward the sponsors’ equity contributions in buyouts and that are subsequently paid down with funds raised in equity sales. Return to text

⁶Forty-nine institutions reported that they had originated prime residential mortgages. These banks accounted for about 71 percent of residential real estate loans on the books of all commercial banks as of March 31, 2007. Return to text

⁷These forty-two institutions accounted for about 62 percent of residential real estate loans on the books of all commercial banks as of March 31, 2007. Return to text

⁸These sixteen institutions accounted for about 57 percent of residential real estate loans on the books of all commercial banks as of March 31, 2007. Return to text

This document was prepared by David Lucca and Gretchen Weinbach with the research assistance of Isaac Laughlin and Oren Ziv, Division of Monetary Affairs, Board of Governors of the Federal Reserve System.