FRB: Senior Loan Officer Opinion Survey: October 2009

October 2009

The October 2009 Senior Loan Officer Opinion Survey
on Bank Lending Practices

The October 2009 Senior Loan Officer Opinion Survey on Bank Lending Practices addressed changes in the supply of and demand for loans to businesses and households over the past three months. The survey also included three sets of special questions: The first asked banks about the reasons for the decline in commercial and industrial (C&I) loans over the first eight months of 2009, the second asked banks about the status of commercial real estate (CRE) loans on their books that were scheduled to mature by September of this year, and the third asked banks about potential changes in credit card lending due to implementation of the Credit Card Accountability Responsibility and Disclosure (Credit CARD) Act. The results reported here are based on responses from 57 domestic banks and 23 U.S. branches and agencies of foreign banks.¹

In the October survey, domestic banks indicated that they continued to tighten standards and terms over the past three months on all major types of loans to businesses and households. However, the net percentages of banks that tightened standards and terms for most loan categories continued to decline from the peaks reached late last year.² The exceptions were prime residential mortgages and revolving home equity lines of credit, for which there were only small changes in the net fractions of banks that had tightened standards. A small net fraction of branches and agencies of foreign banks eased standards on C&I loans, whereas a significant net fraction continued to tighten standards on CRE loans. Demand for most major categories of loans at domestic banks reportedly continued to weaken, on balance, over the past three months. This weakening was somewhat less widespread than in the July survey for C&I loans, CRE loans, and nontraditional mortgages; approximately the same for consumer loans; and significantly more widespread for home equity lines of credit. However, banks reported stronger demand, on net, for prime residential real estate loans. Demand for C&I and CRE loans at foreign banks continued to weaken, on balance, but the weakening was somewhat less widespread than that in the July survey.

In response to a special question on the sources of the decline in C&I lending this year, the two sources domestic banks cited most often as being "very" important were decreased originations of term loans and decreased draws on revolving credit lines. In response to a second special question, banks indicated that, of the CRE loans on their books that were scheduled to mature by September of this year, more loans had been extended than refinanced. In response to special questions concerning the Credit CARD legislation passed in May 2009, a majority of banks reported that they had yet to fully comply with the new law. Banks indicated that they expected to tighten many of the terms and conditions of credit card loans as a result of the legislation, with the notable exception of penalty fees and the length of the grace period for payments.

Business Lending
(Table 1, questions 1-10; Table 2, questions 1-10)

Questions on commercial and industrial lending. The net fraction of banks that reported tightening standards on C&I loans to firms of all sizes was about 15 percent, about one-half of the net fraction that reported doing so in the July survey and substantially below the peak of around 80 percent that was reported in the October 2008 survey.

The net fractions of domestic respondents that reported having tightened selected terms on C&I loans remained fairly elevated but generally continued to fall from the highs reported in late 2008. Some banks reported having eased a few loan terms. Slightly more than 40 percent of banks, on net, reported increasing spreads of loan rates over their cost of funds for firms of all sizes, which represents a decline of about 20 percentage points in such net tightening from the July survey. In addition, slightly less than 40 percent of respondents reported increasing the premiums charged on riskier loans to firms of all sizes. By contrast, only 5 to 20 percent of banks, on net, reported decreasing the maximum maturity of loans or credit lines, decreasing the maximum size of credit lines, and tightening terms on loan covenants for loans to firms of all sizes.

The predominant reasons cited for tightening credit standards or terms for C&I loans were the same as those reported in the previous three surveys. Respondents that tightened standards most commonly cited reduced tolerance for risk, followed by an economic outlook that was less favorable or more uncertain and a worsening of industry-specific problems. Each of the six domestic banks that reported easing loan terms in the latest survey cited more-aggressive competition from other banks or nonbank lenders as the most important reason for doing so.

Notable net fractions of domestic banks reported weaker demand for C&I loans from firms of all sizes, though the weakening was less widespread than in the July survey. In July, roughly 50 percent of domestic banks reported weaker demand for C&I loans to firms of all sizes; that fraction fell to roughly 30 percent and to 35 percent for loans to larger and to smaller firms, respectively, in October. The predominant reasons provided for reduced demand were similar to those cited in the July survey and included decreases in the need to finance investment in plant and equipment, inventories, accounts receivable, and merger and acquisition activity.

For the first time since the April 2007 survey, a positive net share of U.S. branches and agencies of foreign banks reported having eased standards for C&I loans, though about 90 percent reported that their standards remained basically unchanged. About 15 percent of foreign respondents, on net, reported narrower spreads of loan rates over their cost of funds and lower premiums charged on riskier loans. Like the domestic banks, each of the five foreign banks that reported easing standards or terms cited more-aggressive competition from other banks or nonbank lenders as the most important reason for having done so. Only about 5 percent of foreign banks, on net, reported a decrease in demand for C&I loans.

Special question on commercial and industrial lending. The October survey included a special question on C&I lending, motivated by the significant decline in C&I loans outstanding over the first eight months of 2009. Domestic banks indicated that decreased originations of term loans and reduced draws on revolving credit lines were generally more important sources of the declines than paydowns of outstanding C&I loan balances. More specifically, decreased originations of term loans and decreased draws on revolving credit lines were cited by 45 percent and 30 percent of banks, respectively, as "very" important sources of the decline in C&I loans this year. About 15 percent of banks reported that increased paydowns of draws on revolving credit lines (besides such draws taken down as precautionary liquidity during the market disruptions last fall and winter) were a "very" important source of the decline. Less than 10 percent of respondents pointed to increased writedowns and paydowns of draws on revolving credit lines taken down as precautionary liquidity as being "very" important sources of the decline in C&I loans this year. However, about 45 percent reported each of the two sources as being "somewhat" important. Relatively few domestic banks reported that an increase in sales or syndications of outstanding loans was an important factor for the decline.

Among the foreign respondents indicating that C&I lending had declined at their banks this year, about 45 percent reported that decreased originations of term loans was a "very" important source of the decline. About 15 percent of foreign banks also reported increased writedowns as being "very" important.

Questions on commercial real estate lending. About 35 percent of domestic respondents reported tightening standards on CRE loans in the latest survey, a slightly smaller fraction than the 45 percent that reported having done so in July. The net percentage of respondents that reported weaker demand for CRE loans remained high by historical standards at about 45 percent, but this fraction dropped almost 20 percentage points relative to July. About 20 percent of foreign respondents, on net, reported tighter credit standards in the latest survey, and a similar fraction indicated that demand for CRE loans had weakened. In both cases, these fractions were down somewhat from July.

Special question on commercial real estate lending. The October survey included a special question on the status of CRE loans on banks' books that, at the beginning of 2009, were scheduled to mature by September of this year. Among the domestic respondents that reported having such loans, about 75 percent indicated that they had extended more than one-fourth of maturing construction and land development loans, and 70 percent reported extending more than one-fourth of maturing loans secured by nonfarm nonresidential real estate. In contrast, only 15 to 20 percent of domestic banks reported that they had refinanced more than one-fourth of each of the two types of maturing CRE loans.

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

Questions on residential real estate lending. About 25 percent of banks, on net, reported in the latest survey that they had tightened standards on prime residential real estate loans over the past three months. This figure is slightly higher than in the July survey but is still significantly below the peak of about 75 percent that was reported in July 2008. For the third consecutive quarter, banks reported that demand for prime residential real estate loans strengthened on net. About 30 percent of banks reported tightening standards on nontraditional mortgage loans, which represents a decline of about 15 percentage points in net tightening from the July survey. Only about 5 percent of domestic respondents, on net, reported weaker demand for nontraditional mortgages, the smallest net fraction reporting so since the survey began to include questions on the demand for nontraditional mortgages in April 2007.

The net percentage of respondents that tightened standards on revolving home equity lines of credit was about 30 percent, roughly the same as in the previous survey. A net fraction of 30 percent of banks reported weaker demand for home equity lines of credit, compared with about 15 percent in the previous survey.

Question on consumer lending. About 15 percent of respondents reported tightening standards for credit card loans to individuals or households, down from the 35 percent that reported doing so in the previous survey and the smallest net percentage reported since April 2008. Sizable net fractions of banks--between 30 and 40 percent--continued to report tightening various terms and conditions on credit card loans, including credit limits, interest rate spreads, minimum required credit scores, and their willingness to grant loans to customers who do not meet credit-scoring thresholds.

About 15 percent of banks, on net, reported having tightened standards on consumer loans other than credit card loans, down from the 35 percent that reported having done so in the previous survey and the smallest net percentage of tightening recorded since January 2008. With the exception of interest rate spreads, which nearly 35 percent of banks reported having widened, reports of tighter terms on other consumer loans were also less prevalent.

For consumer loans of all types, 25 percent of banks reported weaker demand, roughly the same as in the July survey.

Special Questions on the Credit CARD Act of 2009
(Table 1, questions 21-23)

The October survey included a special question on banks' expectations with regard to the effects of the Credit CARD Act of 2009. Of the banks that make credit card loans, 75 percent did not expect to be compliant with the provisions of the legislation until February 2010, when most of the provisions will go into effect, whereas the rest were either already compliant or expected to be compliant by the end of this year.

As a result of the act, banks reported that they expect to tighten (or have already tightened) many terms on credit card loans for both prime and nonprime borrowers, although small fractions of banks reported, on net, that they expected to lengthen grace periods for prime borrowers and decrease penalty fees for both prime and nonprime borrowers.

For prime borrowers, about 50 percent of respondents, on net, expected to increase interest rate spreads, reduce credit limits, and reduce the extent to which loans will be granted to customers who do not meet credit-scoring thresholds. On net, about 45 percent of banks also expected to raise minimum required credit scores and about 40 percent expected to raise annual fees for prime borrowers. Expectations for tightening various terms were relatively more common for loans to nonprime borrowers. For nonprime borrowers, about 75 percent of banks expected to increase interest rate spreads, and about 60 percent expected to reduce the extent to which loans will be granted to customers who do not meet credit-scoring thresholds and to reduce credit limits. In addition, about 55 percent and 45 percent of banks also expected to raise minimum required credit scores and to raise annual fees, respectively, for nonprime borrowers.

The survey also included two questions on interest rate practices for credit card loans. A net fraction of about 35 percent of banks expected to increase the use of risk-based pricing, and about 30 percent expected to increase the use of variable interest rates and decrease the use of fixed interest rates.

Questions on Existing Credit Lines
(Table 1, question 24; Table 2, question 11)

As in the July survey, sizable net fractions of domestic respondents reported decreasing the sizes of credit lines for existing customers on most types of accounts. For certain loan categories, such as home equity lines of credit, commercial construction lines of credit, and lines of credit for financial firms, the net percentages of banks reporting such adjustments increased.

As in the July survey, considerable net fractions of foreign respondents reported decreasing the sizes of credit lines for existing customers on C&I credit lines, commercial construction lines of credit, and lines of credit to financial firms. Nevertheless, the net percentages of foreign banks reporting such changes edged down from their levels in the July survey.

¹Respondent banks received the survey on or after October 6, 2009, and their responses were due by October 20, 2009. Return to text

²For questions that ask about lending standards, reported net percentages equal the percentage of banks that reported tightening standards ("tightened considerably" or "tightened somewhat") minus the percentage of banks that reported easing standards ("eased considerably" or "eased somewhat"). For questions that ask about demand, reported net percentages 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

This document was prepared by Seung Jung Lee and Jonathan Rose with the assistance of Thomas Spiller, Division of Monetary Affairs, Board of Governors of the Federal Reserve System.