Senior Loan Officer Opinion Survey on
Bank Lending Practices

The October 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, a series of questions on banks' participation in the secondary market for C&I loans, and a question on loans secured by real estate but used for purposes other than the acquisition or improvement of real estate. Responses were received from fifty-eight domestic and twenty-one foreign banking institutions.

Almost all domestic banks and U.S. branches and agencies of foreign banks indicated that lending standards were basically unchanged over the past three months for all types of loans. In addition, for the second consecutive survey, small net fractions of domestic banks reported easing spreads on C&I loans and on credit card loans. Banks that eased lending conditions on C&I loans frequently reported doing so in response to increased competition from nonbank lenders.

On the demand side, also for the second consecutive survey, the net fraction of banks that reported weaker demand for C&I loans declined, to less than 15 percent for borrowers of all sizes. Demand for commercial real estate loans at domestic banks weakened at about the same pace as in the previous survey (August 2003). Meanwhile, respondents indicated that demand for mortgage loans to purchase homes declined over the past three months, the first reported weakness in two years.(1)¹ Demand for consumer loans, however, reportedly continued to strengthen, though at a less rapid pace than in August.

The large majority of domestic banks with assets of more than $20 billion and U.S. branches and agencies of foreign banks reported selling adversely rated loans in the secondary loan market over the past two years. Domestic banks indicated that the most important reason for doing so was to reduce the level of risk in their C&I loan portfolios as a whole, while foreign institutions ranked reducing their exposure to individual borrowers highest. Investment banks and other nonbank financial institutions were reportedly the primary purchasers of adversely rated loans.

Lending to Businesses

(Table 1, questions 1-14; Table 2, questions 1-14)

In the October survey, domestic banks, on net, reported that lending standards on C&I loans for firms of all sizes were about unchanged. In contrast, a small percentage had tightened standards on those loans in the August survey. However, the largest domestic banks in the sample--those with assets of more than $20 billion--eased their lending standards, on net, over the past three months. A small net fraction of U.S. branches and agencies of foreign banks also eased lending standards, including one foreign bank that reported it had eased standards "considerably."

For the second consecutive survey, modest net fractions of domestic banks reported reducing the spreads of loan rates over the cost of funds for borrowers of all sizes. Domestic banks also reported easing terms on credit lines for larger borrowers, with 10 percent of respondents, on net, increasing the maximum size of credit lines and 5 percent, on net, reducing the cost of these lines. As with standards, the easing of terms generally occurred at the largest banks in the sample, while smaller banks continued to tighten most terms, on net. This movement reverses the pattern on surveys between the middle of 2000 and the end of 2002, in which the largest banks had been more likely than other banks to report tightening standards and terms. Foreign institutions, on net, reported no change in spreads on loans or in the cost or size of credit lines. As in August, however, moderate net fractions of domestic and foreign institutions increased the risk premiums charged on loans to their riskiest borrowers, and small fractions tightened collateral requirements.

Nearly 70 percent of the domestic banks that reported tightening standards and terms on C&I loans continued to report a reduced tolerance for risk as an important reason for doing so. About 80 percent of the domestic and foreign banks that tightened lending standards or terms indicated that concern about the economic outlook was at least a somewhat important reason for tightening; but a similar percentage of the institutions that eased standards or terms cited an improved economic outlook as a reason for doing so. Moreover, although the percentages of banking institutions tightening standards and terms that cited concern about the economic outlook and industry-specific problems were higher than in August, they represented a much smaller number of banks because fewer institutions reported tightening standards and terms. Increased competition from other banks or nonbanks was cited by all of the foreign banks that eased lending conditions and about 80 percent of the domestic banks that did so.

The October survey indicates that the deterioration in demand from commercial borrowers has slowed and shows signs of stabilizing. Although 12 percent of domestic banks, on net, reported that demand for C&I loans from large and middle-market borrowers had weakened over the previous three months, that percentage is down significantly from the 22 percent that reported weaker loan demand in August and from the 40 percent that had reported weaker demand in April. In the current survey, only 4 percent of domestic banks, on net, reported weaker demand from small firms, whereas 12 percent, on net, had reported weaker demand in August. About 20 percent of domestic respondents and 35 percent of the largest banks, on net, indicated that inquiries from potential business borrowers had increased, up from only 10 percent and 20 percent, respectively, in August. U.S. branches and agencies of foreign banks reported no change in demand, on net, over the past three months, but 24 percent of these institutions, on net, indicated that the flow of inquiries from potential customers had picked up.

On net, banks continued to cite reduced investment in plant and equipment as the most important reason for weaker demand for C&I loans. A small net percentage of banks reported that demand for credit to finance inventories and accounts receivable had decreased. Several respondents said that demand for C&I loans had risen in part because borrowing had shifted to their bank from other credit sources; however, other domestic and foreign banks indicated that increased competition had reduced demand at their institutions. Demand for loans to finance mergers and acquisitions, which had previously been a frequently cited reason for weaker demand, was reported to have nearly stabilized, on net, in October.

The secondary market for C&I loans. Most of the domestic survey respondents with assets of more than $20 billion and nearly all of the U.S. branches and agencies of foreign banks indicated that they had sold adversely rated loans (those rated as special mention or classified as substandard, doubtful, or loss) in the secondary market at some time during the past two years. Almost 20 percent of the largest banks indicated that they sold more than 10 percent of those loans, while about 60 percent of all domestic banks that participated in the secondary market sold less than 5 percent of their adversely rated loans. Foreign institutions used the secondary market to reduce their exposure to these credits somewhat more aggressively: About one-third had sold more than 10 percent of their problem credits.

The most important reasons domestic banks gave for selling adversely rated loans were to trim the overall credit risk of their portfolio and to reduce exposure to particular firms. On average, domestic banks ranked the price that they obtained in the secondary market relative to their perception of the loan's value as a less important motive for selling than reducing credit risk. By contrast, foreign institutions on average ranked the attractiveness of the price as a close second to reducing exposure to particular firms.

Investment banks purchased about 50 percent of the adversely rated loans sold by domestic banks and more than 40 percent of those sold by U.S. branches and agencies of foreign banks. Nearly 25 percent of the adversely rated credits sold by domestic banks, and 30 percent of such loans at foreign banks, were bought by nonbank financial institutions, such as hedge funds and distressed debt funds, or other private investors. About 15 percent of the adversely rated loans sold by domestic banks reportedly went to other U.S. commercial banks, and about the same percentage of those loans sold by foreign banks were said to have been purchased by U.S. commercial banks. Among domestic banks that sold a significant share--more than 10 percent--of their adversely rated loans on the secondary market, purchasers were mainly investment banks, distressed-loan funds, or private venture groups.

Banks were also asked to indicate the shares of any loans (adversely rated or other) that they sold at specified ratios of the secondary market price to face value. As industry reports also indicate, the distressed market was very important for banking institutions that wanted to unload deteriorating credits. Domestic banks reported that, on average, almost 35 percent of loan sales were at 75 percent or less of face value and about 50 percent of the loans were sold for 85 percent or less. At foreign banks, the shares were similar, 31 percent and 47 percent respectively. About 25 percent of the loans sold by domestic banks and 28 percent of the loans sold by foreign banks, on average, were sold at between 95 percent and 100 percent of par, and a small percentage of loans were sold above par.

A much smaller fraction of domestic banks--about 25 percent--reported that they had purchased loans in the secondary market, and those that did tended to purchase only loans that were trading above 90 percent of their face value. Foreign institutions were much more active purchasers of loans, though they too tended to buy only loans trading above 90 percent of face value.

Commercial real estate lending. Domestic banks reported that standards on commercial real estate loans were about unchanged, on net, over the past three months; the response ended a long period in which they had continuously tightened standards. One foreign bank reported easing standards on these loans. Demand for commercial real estate loans continued to erode at domestic banks, with 10 percent, on net, reporting a decline in demand in the October survey, about the same as in August, while at foreign institutions demand was unchanged. On net, 5 percent of domestic banks reported that there had been a slight increase over the past year in the volume of loans to commercial and industrial firms secured by real estate but used for purposes other than the acquisition or improvement of real estate. Thus, increases in such loans have apparently not contributed significantly to the decline in C&I loans over the same period, at least at respondent banks.

Lending to Households

(Table 1, questions 15-22)

Demand for mortgages to purchase homes reportedly weakened over the past three months. On net, 19 percent of domestic banks reported weaker demand for residential mortgage loans, whereas in August, 46 percent of banks had reported increased demand for mortgages. However, banks may find it hard to separate mortgage originations used to buy homes from those used to refinance existing mortgages. Concurrently, banks reported no change, on net, in lending standards on residential mortgages, about what they reported in the August survey.

Fourteen percent of banks, on net, indicated that they were more willing to make consumer loans in the current survey, about the same share as in August. Consistent with this report, only one bank tightened standards on credit card loans and, as had been the case in the past two surveys, a small net fraction of banks reported easing spreads on credit card loans. Only one bank tightened standards on other types of consumer loans, but 8 percent, on net, reported increasing spreads on those loans. In addition, 10 percent of banks increased the minimum credit score required to obtain a credit card loan, and 6 percent, on net, did so for other types of consumer loans. About 20 percent of respondents indicated that they had reduced the extent to which they were willing to grant credit card loans to individuals who did not meet credit scoring thresholds, while 11 percent of domestic banks, on net, had done so for other types of consumer loans. About 4 percent of respondents, on net, indicated an increase in demand, compared with an unusually large 30 percent that had reported stronger demand in the August survey.

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

Charts (13.2 KB PDF)
Measures of lending practices from current and previous surveys
Chart data (ASCII)

Table 1 (24.2 KB PDF)
Summary of responses from U.S. banks

Table 2 (15.7 KB PDF)
Summary of responses from branches and agencies of foreign banks

Full report (60.7 KB PDF)