Senior Loan Officer Opinion Survey on
Bank Lending Practices

The January 2004 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 series of questions on commercial real estate lending; banks were asked about longer-term changes in terms on commercial real estate loans, the types of properties used to secure these loans, and commercial real estate loan securitizations. Responses were received from fifty-six domestic and twenty-one foreign banking institutions.

Moderate net fractions of both domestic banks and U.S. branches and agencies of foreign banks indicated that they had eased lending standards and several lending terms on C&I loans over the past three months. A few domestic banks also eased lending standards on commercial real estate loans over the same period. After reporting declining demand for C&I loans for the past three years, domestic banks, on net, indicated in the January survey that loan demand from firms of all sizes had strengthened. By contrast, foreign institutions continued to report weaker C&I loan demand on net. Both domestic and foreign institutions reported stronger demand for commercial real estate loans, on net, over the past three months.

Small net fractions of domestic banks indicated that they had tightened some terms on credit card loans, but standards and terms on other household loans were reportedly unchanged. A sizable net percentage of banks experienced weaker demand for loans to purchase homes over the past three months, and a number of institutions indicated that demand for all types of consumer loans had declined over the same period.

Lending to Businesses

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

In the January survey, 18 percent of domestic banks, on net, reported that they had eased their lending standards on C&I loans for large and middle-market firms over the past three months, the largest reported net easing since the latter half of 1993. In addition, 11 percent of domestic banks, on net, indicated that they had eased standards on loans for small firms. Similarly, a moderate fraction of U.S. branches and agencies of foreign banks reported an easing of lending standards on C&I loans over the past three months.

In addition to easing their credit standards on C&I loans, commercial banks reported easing a number of terms on such loans over the past three months. On net, about 25 percent of domestic banks indicated that they had narrowed the spreads of loan rates over their cost of funds for large and middle-market borrowers, up from 14 percent in the October survey. Domestic banks also continued to trim spreads on business loans for small borrowers. About 15 percent of foreign institutions, on net, noted that they had narrowed spreads on C&I loans, compared with no change in the previous survey. For the first time since the fourth quarter of 1998, when the survey began collecting information on risk premiums, domestic banks, on net, reported no net tightening of premiums charged on riskier loans to large and middle-market firms. Domestic and foreign institutions, on net, continued to report an easing of terms on credit lines, including increasing their maximum sizes and lowering their costs.

According to survey respondents, more-aggressive competition from other banks and nonbanks, as well as an improvement in the economic outlook, were the most important reasons behind their decisions to ease credit standards and terms on C&I loans over the past three months. About 80 percent of the domestic banks, and more than 70 percent of the foreign institutions that reported an easing of standards or terms cited more-aggressive competition as a reason for doing so, and 36 percent of domestic respondents indicated that this was a very important reason. About 75 percent of the domestic institutions that eased their lending policies pointed to a more favorable economic outlook. Among these domestic institutions that reported a tightening of standards and terms on C&I loans, a reduced tolerance for risk was the most frequently cited reason for having done so.

C&I loan demand. For the first time since early 2000, domestic survey respondents noted that the demand for C&I loans had strengthened. Over 20 percent of domestic banks, on net, reported increased demand for C&I loans from small firms, and 11 percent, on net, reported stronger demand from large and middle-market firms. In the October survey, 4 percent of domestic banks, on net, indicated weaker loan demand from small firms, and 12 percent, on net, reported weaker demand from large and middle-market borrowers. The apparent turnaround in reported loan demand over the past three months was also reflected in a rising proportion of domestic respondents that experienced an increase in the number of inquiries from potential business borrowers: 36 percent of domestic institutions, on net, reported an increase in the number of inquiries in the January survey, up from 18 percent in October and 10 percent in the August survey. However, foreign institutions continued to report a deterioration in C&I loan demand.

According to domestic respondents, the most important reasons for the strengthening of loan demand over the past three months were increased customer investment in plant and equipment and increased customer needs to finance accounts receivable and inventories. Of the domestic banks that experienced a decline in demand, about two-thirds indicated that it was due in part to an increase in their customers' internally generated funds, and two-thirds also attributed the decline in part to a shift in their customers' borrowing to another bank or a nonbank credit source. Branches and agencies of foreign banks cited the same reasons as domestic banks for decreased C&I loan demand.

Commercial real estate lending. A few domestic banks, on net, reported easing their lending standards on commercial real estate loans in the January survey, whereas in October, lending standards on these loans were about unchanged on net. Demand for commercial real estate loans was reported to have strengthened for the first time since 2000. More than 15 percent of domestic banks, on net, reported that the demand had increased over the past three months, a turnaround from the October survey, when about 10 percent of domestic respondents, on net, reported weaker demand. More than 20 percent of foreign institutions, on net, also experienced stronger demand for commercial real estate loans over the past three months, compared with no net change in demand reported in October.

This survey included special questions about changes in terms on commercial real estate loans over the past year. About 20 percent of domestic banks, on net, reported that they had increased the maximum size of the commercial real estate loans that they are willing to extend, and 13 percent, on net, indicated that they are willing to provide longer maturities on these loans. Most other lending terms on commercial real estate loans were little changed, on net, in 2003. Among domestic institutions, the most frequently cited reasons for easing were more-aggressive competition from other commercial banks or nonbank lenders and an improvement in the condition of, or outlook for, the commercial real estate market.

In responses to a special question about the various types of real estate used to secure nonfarm, nonresidential commercial real estate loans, domestic banks indicated that office buildings were used as collateral for about 30 percent of these loans, retail developments for 24 percent, and industrial properties for 15 percent. More than 40 percent of nonfarm, nonresidential commercial real estate loans held by foreign institutions were secured by office properties and 20 percent by retail properties. Hotel and resort properties also figured prominently in the commercial real estate portfolios of U.S. branches and agencies of foreign banks.

The survey also asked several questions about the securitization of commercial real estate loans. More than three-fourths of domestic and about half of foreign respondents indicated that less than 5 percent of all commercial real estate loans that their bank originated over the past year had been securitized. However, two domestic banks and four foreign institutions reported that they had securitized more than one-half of the year's originations. Both foreign and domestic institutions noted that the credit quality of commercial real estate loans that they had securitized was comparable to the credit quality of loans that they had originated and held on their books. The vast majority of banks also indicated that they generally do not retain servicing rights or provide credit enhancements such as recourse on the commercial real estate loans they securitize.

Since mid-2002, delinquency rates on commercial real estate loans held by banks and life insurance companies have been stable or falling, while those on loans backing commercial-mortgage-backed securities (CMBS) have been rising. About 90 percent of domestic and about 70 percent of foreign respondents attributed the divergence in the delinquency rates to the tranching structures of CMBS facilities, which facilitate the inclusion of higher-risk mortgages in the CMBS pools. The second most frequently cited reason was that securitized mortgages are less likely to be refinanced than those held on banks' balance sheets. In the May 2003 survey, respondents had indicated that the most important reason for the low delinquency rates on the commercial real estate loans they held was the ability of borrowers to refinance as interest rates declined.

Lending to Households

(Table 1, questions 15-22)

Credit demand from households reportedly weakened over the past three months. On net, almost 40 percent of domestic banks indicated that the demand for residential mortgage loans to purchase homes had deteriorated, a significantly greater proportion than in the October survey. However, respondents may find it difficult to separate mortgage originations used to buy homes from those used to refinance existing mortgages, and the pace of refinancing has slowed considerably since the middle of last year. About 15 percent of banks, on net, reported weaker demand for consumer loans of all types over the past three months, the largest net percentage reporting such weakening since the fourth quarter of 2001.

As for supply, respondents indicated no net change in lending standards on residential mortgages. Lending policies for credit card and other consumer loans were also largely unchanged, although a moderate fraction of banks reported that they had decreased the extent to which credit card accounts are granted to customers who do not meet credit-scoring thresholds.

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

Charts (13.5 KB PDF)
Measures of lending practices from current and previous surveys
Chart data (ASCII)

Table 1 (26.0 KB PDF)
Summary of responses from U.S. banks

Table 2 (17.2 KB PDF)
Summary of responses from branches and agencies of foreign banks

Full report (62.6 KB PDF)