Senior Loan Officer Opinion Survey on
Bank Lending Practices

The August 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 supplementary question on potential demand for commercial and industrial (C&I) loans, as well as special questions on measures taken by banks to support the returns on their business loans in response to declining net interest margins. Fifty-eight domestic and seventeen foreign banking institutions responded to the survey.

The net fraction of banking institutions reporting that they tightened lending standards on C&I loans over the past three months declined to very low levels in August. In addition, domestic banks reported having eased spreads on those loans, on net, for the first time since 1998. Banks that eased terms cited increased competition from nonbank lenders as the reason. Demand for C&I loans was reported to have weakened further over the past three months, in large part because of decreased investment in plant and equipment. However, banks reported a small increase, on net, in inquiries regarding new financing. More than half the respondents reported having used higher upfront fees to support returns on C&I loans, and some banks indicated that they had made limited use of interest rate floors for the same purpose.

The net fractions of banks responding that they tightened standards on loans to households fell from their moderate levels of the past few surveys. Moreover, small net fractions of financial institutions reported having eased spreads on consumer loans. Compared with the two previous surveys, significantly larger net fractions of banks in the August survey reported increased demand both for home mortgages and for consumer loans.

Lending to Businesses

(Table 1, questions 1-11; Table 2, questions 1-11)

In the August survey, the net percentage of domestic banks that reported having tightened standards on C&I loans to large and middle-market firms over the past three months declined further, to 3 percent, from 9 percent in the April survey. Similarly, a significantly smaller net fraction of domestic banks reported having tightened standards to small firms. On net, lending standards at branches and agencies of foreign banks were unchanged in August, whereas in April, 33 percent of those institutions, on net, had reported having tightened.

In addition, markedly fewer domestic banks indicated that they had tightened terms on C&I loans, and some terms were eased, on net. Indeed, for the first time since the market turmoil of 1998, small net fractions of domestic banks reported having reduced spreads of loan rates over cost of funds for borrowers of all sizes. On net, banks reported that the costs of credit lines to large and middle-market borrowers were about unchanged, compared with 18 percent that indicated tightening in the previous survey. However, a notable net fraction of respondents have continued to reduce the size of those lines. A significant net fraction of domestic banks continued to report having increased premiums charged on riskier loans to borrowers of all sizes. Similarly, the net fraction of foreign banks reporting that they tightened lending terms was smaller in the August survey than in the April survey, although the fraction that reduced the size of credit lines and charged higher premiums on riskier loans remained elevated.

Sixty-five percent of the domestic banks that tightened lending standards and terms indicated concern about the economic outlook as an important reason for doing so, down from more than 90 percent in April. In addition, somewhat fewer banks than in April indicated that industry-specific problems were a reason for tightening. Despite reduced fractions of banks expressing concern about the economic outlook and industry-specific problems, banks continued to reduce their tolerance for risk. Indeed, about 75 percent of domestic banks that tightened standards and terms on C&I loans cited a lower tolerance for risk, making it the most commonly reported reason. By contrast, almost all of the foreign institutions that tightened standards and terms remained concerned about the economic outlook and industry-specific problems as well as reporting a reduced tolerance for risk.

Domestic banks, on net, continued to report that demand from large and middle-market firms had weakened over the past three months, but that fraction declined noticeably from almost 40 percent in April to about 20 percent in the current survey. Similarly, a somewhat smaller net fraction of banks reported weaker demand from small firms. For banks that reported weaker demand, the most important reason continued to be decreased investment in plant and equipment by their customers. Banks that experienced increased demand cited numerous reasons for the rise. In contrast to the experience of domestic banks, the same number of foreign institutions reported that demand had weakened as reported that it had increased. In response to a special question about the prospective demand for C&I loans, both domestic respondents and branches and agencies of foreign banks indicated that, on net, the number of inquiries from potential borrowers had risen somewhat over the past three months.

With interest rates having recently reached historically low levels, banks have been reporting downward pressure on their net interest margins. More than 60 percent of foreign and domestic banks said that increased fees charged on credit lines have been important in supporting the return on business lending. About 45 percent of domestic banks and a few foreign banks reported that they had increased their use of interest rate floors; however, most banks reported that fewer than 5 percent of their C&I loans had interest rate floors. Moreover, of the seventeen domestic banks that stated that a material fraction of their C&I loans were subject to an interest rate floor, half of those banks indicated that the floors were binding on less than 40 percent of those loans. The vast majority of respondents reported that they had not increased the average maturity or the risk profile of their C&I loan portfolio to support their net interest margins.

Commercial real estate lending. The net fraction of domestic banks that reported tightening standards on commercial real estate loans fell to 14 percent, a level near the bottom of its recent range. Only one foreign institution reported having tightened standards in August. Demand for commercial real estate loans continued to erode; in the August survey, 12 percent of domestic banks, on net, reported a decline in demand, down from 29 percent in April. At foreign banks, demand was also described as weaker.

Lending to Households

(Table 1, questions 12-19)

The net share of banks that reported stronger demand for residential mortgage loans increased for the second consecutive survey, to about 45 percent, compared with 17 percent in April and 8 percent in January. Three banks said that demand was substantially stronger during the past three months. Concurrently, the net fraction of banks that reported having tightened standards on residential mortgages fell from 12 percent in January to 6 percent in April to 2 percent in the current survey.

A significantly larger net fraction of banks indicated that they were more willing to make consumer loans in the current survey than had been the case since 1999. Consistent with this report, no banks tightened standards on credit card loans, while small fractions of banks again reported having eased spreads on these loans. About 5 percent of banks, on net, tightened standards for consumer loans other than credit cards, down from 12 percent in April. In addition, a few banks, on net, reported that they had narrowed spreads and had extended maturities on these loans. Reported demand for consumer loans jumped in the current survey; about one-third of respondents, on net, indicated an increase in demand, compared with a small reported net decrease in demand during the previous survey period.

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

Charts (12.9 KB PDF)
Measures of lending practices from current and previous surveys
Chart data (ASCII)

Table 1 (22.5 KB PDF)
Summary of responses from U.S. banks

Table 2 (13.5 KB PDF)
Summary of responses from branches and agencies of foreign banks

Full report (53.6 KB PDF)