Senior Loan Officer Opinion Survey on
Bank Lending Practices

The January 2001 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. Supplementary questions addressed the effect on borrowers of the reported tightening of lending standards and terms on C&I loans over the past year, changes in terms on commercial real estate loans over the past twelve months, banks expectations about changes in standards on consumer loans over the next year, and banks leasing operations. Loan officers from fifty-seven large domestic banks and twenty-four U.S. branches and agencies of foreign banks participated in the survey.

The number of domestic and foreign banking institutions that reported tightening standards and terms on C&I loans over the past three months rose further in January. Significant fractions of both domestic and foreign institutions also tightened standards for commercial real estate loans. In general, banks indicated that the most important reasons for tightening standards and terms were a worsening economic outlook and a reduced tolerance for risk. On net, a substantial fraction of respondents reported weaker demand over the past three months for both C&I loans and commercial real estate loans.

Lending conditions also firmed noticeably on the consumer side. A much larger fraction of domestic banks than in the November survey reported tightening standards and terms on non-credit-card consumer loans. On net, about 15 percent of banks indicated that they anticipate some tightening in their standards and terms on all types of consumer loans before the end of 2001, assuming that the economy grows at a sustainable rate. In addition, 35 percent, on net, indicated that demand for all types of consumer loans had weakened somewhat in the last three months. However, almost all domestic banks reported no change in standards for residential mortgage loans, and, on net, demand for residential mortgages was also unchanged.

Lending to Businesses
(Table 1, questions 1-12; Table 2, questions 1-12)

The net percentage of domestic and foreign respondents that tightened standards during the last quarter was even higher than the elevated level in the November survey. Almost 60 percent of domestic banks reported tightening their standards onC&I loans to large and middle-market firms over the past three months, and 45 percent reported tightening standards to small firms over the same period. As in the November survey, about 80 percent of branches and agencies of foreign banks reported tightening standards for customers seeking C&I loans.

Large fractions of domestic banks reported tightening each of the loan terms listed in the survey. Almost three-quarters reported charging higher premiums on riskier loans to large and middle-market firms, including 21 percent that said they increased these premiums considerably. None of the domestic banks reported lowering premiums on riskier loans. About half of respondents, on net, indicated that they had tightened loan covenants and raised the cost of credit lines for large and middle-market firms over the past three months. Nearly 60 percent of domestic banks, on net, increased the spreads of loan rates over their cost of funds for these borrowers as well. Overall, somewhat smaller fractions of domestic banks tightened terms on C&I loans to small firms. Still, premiums on riskier loans to small firms increased at almost 60 percent of domestic banks, and 42 percent of respondents tightened loan covenants for small firms.

Two-thirds of the branches and agencies of foreign banks reported charging somewhat higher premiums on riskier loans, and an additional 17 percent increased these premiums considerably. Three-fourths of foreign institutions increased spreads of loan rates over their cost of funds, and 58 percent indicated a general strengthening of loan covenants. None of the foreign respondents reported easing any of the terms listed in the survey.

Most of the domestic and foreign respondents that had tightened standards or terms on C&I loans cited a less favorable or more uncertain economic outlook, a worsening of industry-specific problems, and a reduced tolerance for risk as reasons for changing their lending policies. About three-fourths of domestic and foreign institutions that had tightened standards and terms on commercial credits over the past three months also mentioned an increase in defaults by below-investment-grade borrowers as important, and many cited decreased liquidity in the secondary market for C&I loans as well.

The January survey included a special question to determine how banks business customers responded to the general tightening of lending standards and terms that has been reported over the past year. Domestic banks indicated that about two-thirds of their customers borrowed as planned despite the stricter lending policies; at foreign institutions, the fraction of businesses that borrowed as planned was about 50 percent. Of those customers that did not borrow as much as planned, both domestic and foreign respondents noted that more than half were able to finance their spending plans either by borrowing elsewhere or by using internal liquid assets. Well under one-fifth of customers reduced spending plans, and only a handful canceled their plans altogether.

On net, about half of domestic banks reported decreased demand for C&I loans from large and middle-market firms, and 30 percent, on net, reported moderately weaker demand from small firms over the same period. Most of the domestic banks that reported weaker loan demand cited a decline in customer demand for credit to finance capital expenditures and reduced demand for financing mergers and acquisitions. A shortage of internally generated funds and increased need for inventory financing were cited as important reasons by the few domestic banks that experienced increased demand. Two large banks noted that they received increased demand from customers that had switched to bank loans from the commercial paper market.

On net, about 20 percent of foreign branches and agencies saw weaker demand over the past three months. A decline in customers need for merger and acquisition financing was cited as an important reason by most of the foreign respondents that saw demand decrease, and a majority also mentioned that their customers had reduced spending on plant and equipment. Each of the four foreign institutions that saw increased demand for C&I loans reported that customers shifted to bank loans because either the commercial paper market or other credit sources became less attractive.

More than 40 percent of domestic banks tightened standards on commercial real estate loans over the past three months, up from 26 percent in the November survey. The fraction of branches and agencies that tightened standards on these loans in the current survey, about 30 percent, was little changed from November. On net, almost 30 percent of domestic respondents and 15 percent of foreign respondents reported weaker demand for commercial real estate loans, in a few cases substantially weaker.

In response to a special question, significant fractions of both foreign and domestic respondents indicated that they had tightened terms on commercial real estate loans over the past year. Most strikingly, about half of the domestic banks increased spreads of loan rates over their cost of funds, and about 40 percent demanded higher debt-service coverage ratios. More than 50 percent of the foreign institutions increased spreads over their cost of funds. Significant fractions of foreign institutions also tightened their requirements for take-out financing, demanded higher loan-to-value ratios, and raised debt-service coverage ratios.

A less favorable economic outlook was the most important reason for tightening terms on commercial real estate loans at both domestic and foreign institutions. Foreign respondents also expressed significant concern about the availability of take-out financing, followed closely by a reduced tolerance for risk. The latter was the second most important reason in the minds of domestic banks that tightened terms. Interestingly, for both domestic and foreign institutions, the number of respondents mentioning a worsening of the outlook for commercial real estate in the market where they operate as an important factor was slightly smaller than the number mentioning general economic weakness.

Lending to Households
(Table 1, questions 13-21)

Over the past three months, domestic banks credit standards for approving residential mortgage loans were largely unchanged. Changes in demand for residential mortgages were quite disparate across respondents, with 30 percent reporting stronger demand and an equal fraction reporting weakness. By contrast, about 33 percent of banks, on net, reported weaker demand for home mortgages in the November survey.

A few domestic banks indicated that they were less willing to make consumer installment loans than they were three months ago, and more than 10 percent of banks tightened standards on credit card loans. For other types of consumer loans, almost 20 percent of domestic banks reported tighter standards, and about 25 percent increased spreads. Relative to recent surveys, this represents a significant increase in the number of banks tightening standards and terms for non-credit-card consumer loans. About 15 percent of banks, on net, expect to tighten their standards and terms on all types of consumer loans before the end of 2001, even if the economy expands at a sustainable rate. In addition, almost 35 percent of domestic banks, on net, reported that demand for all types of consumer loans had weakened over the past three months, compared with only 13 percent that observed weaker demand in the November survey.

Leasing Activities at Domestic Banks
(Table 1, questions 22-24)

Lease financing has been expanding rapidly at domestic commercial banks since the late 1990s. The January survey asked three special questions designed to elicit information on the composition of leases at banks and on the reasons that leases have grown over that period. Banks reported that more than 60 percent of their leases are made to nonfinancial corporations, and they also noted that this category was the primary area of growth in lease financing over the past several years.

The rise in lease financing has accompanied rapid expansion in the types of capital investment for which lease financing is commonly used. Acquisitions of leases from third parties and a more competitive leasing market were also mentioned as important factors in the growth of these assets at domestic banks. Almost a third of the leases held by banks are consumer leases, which several respondents noted are primarily auto leases. However, two domestic banks indicated that they are exiting consumer leasing.

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

Charts (12.4 KB PDF)
Measures of lending practices from current and previous surveys
Chart data (ASCII)

Table 1 (27.3 KB PDF)
Summary of responses from U.S. banks

Table 2 (14.7 KB PDF)
Summary of responses from branches and agencies of foreign banks

Full report (66.5 KB PDF)