Senior Loan Officer Opinion Survey on
Bank Lending Practices

The January 2003 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. In addition, the survey contained a set of supplementary questions that focused on banks' participation in the credit default swap market. Fifty-nine domestic and twenty foreign banking institutions responded to the survey.

Domestic and foreign institutions continued to tighten lending standards and terms for commercial and industrial (C&I) loans over the past three months in fractions similar to those reported in the October survey. Business loan demand again was reportedly weaker on balance, but the net fraction of banks that reported weaker demand was significantly lower than in the previous survey, and several banks reported stronger demand. Both domestic and foreign institutions continued to relate concern about the economic outlook as well as industry-specific problems.

A significant portion of domestic bank respondents with assets greater than $20 billion and half of foreign institutions use credit default swaps either to hedge loan risk or to increase credit exposure. However, most other domestic banks reported that they made little or no use of credit default swaps, which they reportedly view as a relatively expensive way to hedge loan risk and a complicated way to acquire credit exposure.

On the household side, the fractions of banks that tightened standards and terms on credit cards and other consumer loans remained at the modest levels of recent surveys. However, evidence that some banks are beginning to tighten standards on home mortgages appeared for the second consecutive survey. Demand for consumer loans was about unchanged on net, but the net fraction of banks that reported stronger demand for home mortgages declined sharply.

Lending to Businesses
(Table 1, questions 1-18; Table 2, questions 1-18)

In January, the percentage of domestic banks that reported having tightened standards on C&I loans to large and middle-market firms over the past three months remained at about 20 percent for the third consecutive survey. In contrast to the previous two surveys, however, three of the banks that tightened lending standards to larger firms in the most recent survey classified the tightening as considerable. The percentage of domestic banks that reported tightening standards for small firms edged down from 18 percent in October to 14 percent in January.

The number of domestic banks that reported tightening terms on large and middle-market borrowers declined a bit between the October and the January surveys: the net share of banks that reported raising fees on credit lines fell to 22 percent from 30 percent, while the net share of banks that reported increasing collateralization requirements slipped to 17 percent from 23 percent. Two banks reported reducing spreads for some loans, in part because of more aggressive competition from other lenders. Nonetheless, the percentage of banks that reported increasing premiums on riskier loans remained high, at around 40 percent. The percentage of banks tightening terms on loans to small firms also moved down slightly.

Although a less favorable economic outlook was still cited by most domestic banks as at least a somewhat important reason for tightening lending conditions, the fraction of banks that listed this as a very important reason declined from 23 percent in October to 12 percent in January. In addition, the fraction of banks citing reduced tolerance for risk fell from 71 percent in October to 63 percent in the current survey. By contrast, the percentage of domestic banks that reported that worsening industry-specific problems were a reason for tightening rose substantially, from 39 percent in October to 66 percent in January.

The fraction of U.S. branches and agencies of foreign banks that tightened standards and terms on C&I loans over the past three months moved lower for the second consecutive survey. The percentage of foreign institutions that had tightened standards for customers seeking C&I loans or credit lines declined from 60 percent in August and 50 percent in October to 30 percent in the current survey. Similarly, the fraction of foreign institutions that raised premiums on loans to riskier customers declined from 55 percent to about 40 percent between the October and January surveys, and the fraction of foreign institutions that increased spreads on all loans over their cost of funds fell from 65 percent in the previous survey to 45 percent in January. Foreign institutions that tightened standards or terms generally cited a less favorable economic outlook and reduced tolerance for risk as the most important reasons for tightening.

The number of domestic banks reporting weaker demand from both large and small firms declined in January. For large and medium-size firms, the net percentage of banks that reported weaker demand declined from 53 percent in October to 32 percent in the current survey. For small firms, the net percentage tumbled from 48 percent to 21 percent. The net share of branches and agencies of foreign banks reporting weaker demand also fell, to 20 percent in January from 40 percent in October.

As in previous surveys, almost all domestic banks that experienced weaker loan demand reported that a decline in customers' need for bank loans to finance capital expenditures was at least a somewhat important reason. Reduced needs to finance mergers and acquisitions, inventories, and accounts receivable also continue to be cited by most banks as reasons for weaker demand. The eleven domestic banks that reported an increase in demand for C&I loans over the past three months listed a variety of reasons for this increase, including a shift to bank financing from non-bank credit sources and an increased need for inventory financing. The most frequently cited reasons for weaker loan demand at branches and agencies of foreign banks continued to be a decline in merger and acquisition activity and reduced customer investment in plant and equipment.

Credit default swaps. Credit default swaps (CDS) have become an increasingly important tool for managing credit risk at a number of financial institutions. Of the thirty-six largest domestic banks that participated in the survey, about 35 percent use CDS to hedge risk in their C&I loan portfolio. Even among those banks that use CDS, however, the majority do so for less than 4 percent of their total C&I loan commitments (outstanding loans plus unused lines of credit). By contrast, about half of the foreign banks surveyed reported purchasing credit protection using CDS, and 25 percent indicated that more than 8 percent of their total C&I loan commitments are hedged in this fashion. The most commonly cited reason, by both foreign and domestic institutions, for buying credit protection is that purchasing the CDS is superior to selling a loan because it preserves the bank's relationship with the borrower.

Smaller fractions of domestic and foreign banks use CDS to acquire credit exposure, and most banks that do invest in CDS report that such exposure is equivalent to less than 2 percent of their total C&I loan commitments. For domestic banks, the two most important reasons for selling credit protection were its risk diversification benefits and its relative profitability. Foreign banks also cited the ability to diversify credit risk as the most important reason for selling credit protection. Almost all banks reported that their participation in the CDS market did not affect their direct C&I lending. However, a few banks indicated that their participation in the CDS market allowed them to moderately increase their C&I direct lending.

Most of the banks' activity in the CDS market is done through dealers. On average, domestic banks purchased nearly 80 percent of their credit protection from dealers, and more than 85 percent of that volume runs through dealers headquartered in the United States. Dealers are the counterparty for an even greater share of credit protection sold by domestic banks, and almost all sales are to U.S.-based dealers. Between 50 percent and 60 percent of the CDS transactions by branches and agencies of foreign banks are also conducted with U.S.-based dealers, but about a third of their purchases and sales of CDS are with dealers headquartered outside the United States.

Domestic banks had a more positive view about liquidity in the market for CDS than foreign institutions, even though the latter were reported to be somewhat more active in the market than the former. Nearly three-fourths of domestic banks that participated in the market reported that it was somewhat easy or inexpensive to unwind a position in a CDS under normal market conditions. Moreover, most domestic banks indicated that current liquidity conditions were about normal or somewhat better than normal. By contrast, 75 percent of foreign banks indicated that it was at least somewhat difficult or expensive to unwind positions under normal market conditions, and about 50 percent characterized the current market as less liquid than normal. Nearly all banks that participate in the CDS market indicated that market quotes on CDS spreads are useful in imputing a value for loan assets or pricing new loans under normal market conditions. Of domestic banks that do not actively participate in the CDS market, about half still find market quotes at least somewhat useful for pricing loans.

Of domestic banks that do not use CDS to hedge loans or as stand-alone investments, 82 percent indicated that they found CDS to be expensive relative to the benefits derived from them. Sixty-seven percent of these banks indicated that they do not use CDS because they are generally riskier and more complicated than loans, and 49 percent indicated that it was difficult to find CDS offered in the amounts or maturities they desired.

Commercial real estate lending. The net fraction of domestic banks that reported tightening standards on commercial real estate loans over the past three months slipped from 22 percent in October to 14 percent in January. No foreign institutions reported changing standards for these loans in the current survey, down from three in the October survey. Demand continued to weaken at domestic banks, but the net share of banks reporting weaker demand declined from 48 percent to 21 percent. Most foreign institutions reported unchanged demand.

Lending to Households
(Table 1, questions 19-26)

The share of banks tightening standards on residential mortgage loans edged up to 11 percent in January from 10 percent in the October survey. Notably, these were the first two indications of any noticeable tightening in over a decade. The net fraction of respondents that reported stronger demand for mortgages to purchase homes over the past three months dropped to 7 percent in January from 40 percent in the previous survey. Moreover, the share of banks reporting substantially stronger demand fell from 14 percent in October to 2 percent in the current survey.

As in the October survey, about 15 percent of domestic banks indicated that they had tightened standards on credit card loans over the past three months. However, in the current survey the share of banks that reported tightening standards for other consumer loans edged down to 9 percent from 15 percent in October. Few banks reported that they had tightened any terms on either their credit card loans or other consumer loans over the past three months. On net, demand for consumer loans was reportedly about unchanged over the past three months.

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

Charts (12.8 KB PDF)
Measures of lending practices from current and previous surveys
Chart data (ASCII)

Table 1 (28.4 KB PDF)
Summary of responses from U.S. banks

Table 2 (18.7 KB PDF)
Summary of responses from branches and agencies of foreign banks

Full report (67.1 KB PDF)