Senior Loan Officer Opinion Survey on
Bank Lending Practices

The October 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. The survey included supplementary questions on banks' internal credit risk ratings for business loan customers, loans for the purpose of share buybacks, and liquidity in the secondary market for business loans. Loan officers from fifty-seven large domestic banks and twenty-two U.S. branches and agencies of foreign banks participated in the survey.

The number of foreign and domestic banking institutions that reported tightening standards and terms on commercial and industrial (C&I) loans over the past three months increased notably after having edged down in the previous two surveys. The fraction of domestic institutions that tightened standards for commercial real estate loans in the October survey remained in the elevated range of the past year. For C&I loans, almost twice as many domestic respondents as in the August survey indicated that a less favorable or more uncertain economic outlook was a very important reason for tightening standards and terms, a rise consistent with the weak tenor of recent economic data. Compared with the proportions in the August survey, considerably larger net fractions of domestic banks experienced weaker demand for both C&I and commercial real estate loans over the past three months.

In answer to the special questions in the current survey, most domestic banks and a substantial number of foreign institutions said they had downgraded between 1 percent and 10 percent of the dollar volume of C&I loans on their books over the past three months, in particular singling out loans to firms in the airline and hospitality industries. Much smaller numbers of banks indicated that they had upgraded a portion of their loans. Both domestic and foreign respondents also noted that liquidity in the secondary loan market had deteriorated somewhat in the aftermath of the terrorist attacks.

The net fractions of domestic banks that tightened standards and increased spreads over their cost of funds for all types of consumer loans over the past three months moved up from the levels in the August survey, but they remained within the range of the past several quarters. According to the domestic respondents in the October survey, demand for consumer loans weakened over the period covered by the report, after little net change was reported in the previous two surveys. Standards for residential mortgage loans were largely unchanged over the past three months, and demand for mortgages to purchase homes was reported to be little changed.

Lending to Businesses
(Table 1, questions 1-14; Table 2, questions 1-14)

The October survey showed a rise in the fraction of domestic banks reporting that they had tightened standards on C&I loans over the past three months, a fraction that had moved down in the previous two surveys. The percentage of domestic banks that reported tightening their standards on C&I loans to large and middle-market firms rose to 51 percent in October from 40 percent in August. Results were similar for lending standards on loans to small firms--40 percent of domestic banks reported tighter standards over the past three months, up from 32 percent in August. The net fraction of U.S. branches and agencies of foreign banks that reported tightening standards for C&I customers rose to 64 percent in October from 50 percent in August.

As in the August survey, more than half of domestic banks reported increasing spreads of loan rates over their cost of funds and charging higher premiums on riskier loans to large and middle-market firms. Larger fractions than in August imposed more stringent loan covenants and collateral requirements on these firms. In general, smaller net fractions of domestic respondents tightened terms on loans to small firms. However, the number of banks that tightened non-price-related loan terms for small firms rose considerably when compared with the August survey. Despite the overall tightening of standards and terms over the past three months, a few banks indicated a willingness to address the needs of business customers in areas affected by the atrocities of September 11.

The tightening of terms at U.S. branches and agencies of foreign banks was somewhat more pronounced than at their domestic counterparts. Compared with the previous survey, when 50 percent of foreign respondents increased spreads of loan rates over their cost of funds, 64 percent reported doing so in October. Similarly, the fraction of foreign institutions that raised premiums on riskier loans rose from 60 percent in August to 64 percent in the current survey. The fraction of foreign banks that increased the cost of credit lines and tightened collateral requirements over the past three months also rose relative to the previous survey.

All survey respondents pointed to a less favorable or more uncertain economic outlook as at least a somewhat important reason for changing their commercial lending policies; moreover, that reason was said to be very important for 63 percent of domestic banks, up significantly from 37 percent in the August survey. Nearly all of the domestic and foreign respondents that had tightened standards or terms on C&I loans over the previous three months cited a worsening of industry-specific problems, and more than 60 percent mentioned a reduced tolerance for risk as important reasons for changing their lending policies. Concern about credit quality in the corporate bond market was also cited as a reason for tightening credit by 44 percent of domestic banks and 75 percent of foreign branches and agencies.

More than 70 percent of domestic banks, on net, reported weaker demand for C&I loans from large and middle-market firms over the past three months, up considerably from about one-half in the August survey. Loan demand from small firms also weakened, with about one-half of domestic respondents, on net, noting weakness in October, compared with 42 percent in August. On net, almost one-third of foreign branches and agencies saw weaker demand over the past three months, compared with one-fourth in the previous survey. Many banks commented that the terrorist attacks exacerbated an ongoing slowdown in demand for business loans.

All but one domestic bank that reported weaker business loan demand cited a decline in customers' need for credit to finance capital expenditures as at least a somewhat important reason, and almost 40 percent chose the same reason as very important. Most domestic respondents also noted a decline in demand to finance mergers and acquisitions, inventory accumulation, and accounts receivable. Forty-four percent of the foreign institutions that reported weaker loan demand pointed to the decline in demand for merger-related financing and lower investment spending as very important reasons, with the same fraction noting that these reasons were somewhat important.

In light of the pace of net downgrades of corporate debt by the major credit rating agencies, the October survey included a series of questions about changes in banks' internal credit risk ratings. Almost all domestic and foreign institutions indicated that more than three-fourths of the dollar volume of their C&I loans is internally rated. About one-half of the domestic banks surveyed had downgraded less than 5 percent of their C&I loan portfolio over the past three months. Twenty-eight percent of them had downgraded between 6 percent and 10 percent, and 21 percent had downgraded between 11 percent and 30 percent of their business loans over the same period. Foreign branches and agencies downgraded somewhat larger fractions of the C&Iloans on their books. In particular, almost 20 percent of these institutions downgraded more than 20 percent of their business loan portfolios. The reported downgrades in internal risk ratings at both domestic and foreign respondents were offset to some extent by upgrades: More than 55 percent of domestic and foreign banks indicated that they had upgraded at least some loans in their C&I loan portfolios.

Almost 30 percent of domestic respondents and 40 percent of foreign respondents noted that they had downgraded considerably their loans to commercial airlines and other nondefense aerospace firms, with significant additional fractions reporting more moderate downgrades in these sectors. The portion of the banks' portfolios covering loans to travel and other leisure-related service businesses was also hard hit by downgrades, likely reflecting the disruptions caused by the terrorist attacks. Downgrades were pervasive among loans to high-technology firms and to automobile manufacturers and distributors, as well as to firms in consumer cyclical industries. Of the sectors named in the survey, only energy and defense avoided widespread downgrades over the past three months.

In the aftermath of the terrorist attacks, as market liquidity became a concern, the SEC temporarily eased restrictions on share repurchases, and reports from some market participants suggested that buyback activity was elevated in the ensuing weeks. Very few domestic banks, however, reported an increase in demand for loans to finance share buybacks, but a modest fraction of foreign institutions experienced some increase in demand for this type of loan. About 30 percent of both foreign and domestic banks tightened standards for below-investment-grade firms on loans to finance equity repurchases.

A separate question asked banks about changes in the liquidity of the secondary market for C&I loans since September 11. Combined, about one-sixth of domestic and foreign institutions reported that loan-trading volume had decreased considerably, and more than one-half noted that it had decreased somewhat. The diminished volume was accompanied by widening bid-asked spreads, with 21 percent of all institutions reporting that the spreads had widened considerably, and almost one-half of them indicating that the spreads had widened somewhat. Separate comments by several loan officers indicated that the reduction in liquidity was particularly severe for loans rated as below investment grade.

Almost 45 percent of domestic banks tightened standards on commercial real estate loans over the past three months, up a tad from the August survey. About one-fourth of the foreign institutions that engage in commercial real estate lending also tightened standards in the current survey. The demand for commercial real estate loans weakened over the survey period, with more than half of domestic and 23 percent of foreign respondents, on net, reporting lower demand for this type of loan.

Lending to Households
(Table 1, questions 15-22)

Banks' credit standards for approving residential mortgage loans were largely unchanged over the past three months, with only two banks reporting that they had tightened lending standards somewhat. According to the domestic respondents, demand for residential mortgages remained almost unchanged, on net, over the same period.

One-fifth of banks reported that they had tightened standards on both credit card and other types of consumer loans over the past three months, somewhat higher fractions than reported do so in the August survey. In addition, 14 percent of domestic banks increased the minimum required credit score for credit card applications, and 21 percent of them raised spreads of interest rates charged on outstanding balances relative to their cost of funds. For other types of consumer loans, 14 percent of respondents raised the minimum required credit score, and 24 percent of them increased spreads over their cost of funds. Almost one-fourth of domestic banks, on net, reported moderately weaker demand for consumer loans over the past three months.

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

Charts (13.4 KB PDF)
Measures of lending practices from current and previous surveys
Chart data (ASCII)

Table 1 (25.1 KB PDF)
Summary of responses from U.S. banks

Table 2 (15.8 KB PDF)
Summary of responses from branches and agencies of foreign banks

Full report (98.6 KB PDF)