The January 2006 Senior Loan Officer Opinion Survey
on Bank Lending Practices

Survey | Full report (517 KB PDF)
Table 1 | Table 2 | Chart data
Table 1 (68 KB PDF) | Table 2 (32 KB PDF) | Charts (15 KB PDF)

The January 2006 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 special question on changes in selected terms on commercial real estate loans over the past year. The survey also asked banks about the extent to which the spike in bankruptcy filings in September and early October of last year affected fourth-quarter charge-offs on credit card loans. Finally, banks were queried about their expectations for changes in asset quality in 2006. This article is based on responses from fifty-six domestic banks and nineteen foreign banking institutions.

Domestic commercial banks reported a further net easing of lending standards and terms on commercial and industrial (C&I) loans and no change in lending standards on commercial real estate loans over the past three months. For the same period, a notable net percentage of domestic institutions reported stronger demand for C&I loans from large and middle-market firms, but only a small net fraction of domestic respondents experienced increased demand for commercial real estate loans. Significant net fractions of domestic banks reported that, since the last survey, demand for mortgages to purchase homes was weaker as was demand for consumer loans.

Significant fractions of respondents, on net, reported that they had eased selected terms on commercial real estate loans in 2005. Banks cited more-aggressive competition from other banks or nonbank lenders as the most important reason for having done so. Among banks that experienced an increase in credit card charge-offs in the fourth quarter of 2005 as a result of the introduction of the new bankruptcy law, about three-quarters indicated that less than 40 percent of fourth-quarter charge-offs were attributable to this increase. In addition, banks accounting for more than one-half of credit card loans on respondents' books at the end of the third quarter reported that between 60 percent and 100 percent of the increase in the fourth-quarter charge-offs that reflected the introduction of the new law was attributable to households or individuals who would have filed for bankruptcy anyway later in 2005 or during 2006.

Looking ahead, banks indicated that, on balance, they expect loan quality on loans to businesses and households to deteriorate somewhat in 2006 from current very robust levels.

C&I Lending
(Table 1, questions 1-6; Table 2, questions 1-6) 

Domestic banks indicated that they had further eased standards and terms on C&I loans over the past three months. On net, about 10 percent of domestic institutions noted that they had eased credit standards on C&I loans to large and middle-market firms, roughly the same net fraction as in the October 2005 survey. On net, about 45 percent of domestic respondents reported that they had trimmed spreads of loan rates over their cost of funds for such firms, and about 30 percent of domestic institutions indicated that they had reduced the costs of credit lines. Domestic institutions also reported that they had eased other lending terms to large and middle-market firms over the past three months: On net, one-fourth of banks reported that they had increased the maximum maturity of loans or credit lines, and almost one-fifth of respondents indicated that they had eased loan covenants. The net percentages of banks that reported easing these loan terms were about the same as in the October 2005 survey.

For C&I loans to small firms, 7 percent of domestic respondents, on net, noted that they had eased their lending standards over the past three months. On net, one-third of banks indicated that they had narrowed spreads of loan rates over their cost of funds. About one-fifth of them, on balance, reported having reduced the cost of credit lines and a similar fraction reported having increased the maximum maturity of loans or credit lines over the same period.

As they did in the previous survey, U.S. branches and agencies of foreign banks reported that their standards on C&I loans had changed little. However, significant net fractions of these institutions indicated that they had reduced the cost of credit lines, narrowed spreads of loan rates over their cost of funds, and increased the maximum size of loans or credit lines.

Nearly all domestic institutions that indicated having eased their lending standards and terms in the January survey pointed to more-aggressive competition from other banks or nonbank lenders as an important reason for having done so. Notable net percentages of such respondents also cited an increased tolerance for risk and increased liquidity in the secondary market for these loans as reasons for having eased credit standards or terms on C&I loans.

On net, 16 percent of domestic banks reported stronger demand for C&I loans from large and middle-market firms, roughly the same net fraction as in the previous survey. By contrast, only 5 percent of domestic respondents, on net, reported an increase in demand for C&I loans from small firms. At U.S. branches and agencies of foreign banks, about one-fifth of respondents, on net, indicated that demand for C&I loans had increased over the past three months.

Among the domestic respondents that had experienced stronger demand for C&I loans, most cited borrowers' increased needs to finance accounts receivable and mergers and acquisitions. Substantial fractions of these respondents also pointed to customers' increased needs to finance investment in plant and equipment and in inventories as contributing to the strengthening of business loan demand over the past three months. All foreign institutions that experienced stronger demand for C&I loans cited increased needs to finance mergers and acquisitions; significant fractions of the foreign respondents also pointed to increased investment in inventories and in plant and equipment as important reasons for stronger C&I loan demand. Regarding future business, almost one-fifth of domestic respondents, on net, indicated that the number of inquiries from potential business borrowers had increased over the previous three months, a somewhat larger net fraction than in the October survey. At foreign institutions, the number of inquiries from potential business borrowers was little changed in January.

Commercial Real Estate Lending
(Table 1, questions 7-10; Table 2, questions 7-10)

On net, domestic institutions reported that lending standards on commercial real estate loans were essentially unchanged over the past three months. However, a small fraction of foreign respondents indicated that they had tightened standards on such loans. On net, 4 percent of domestic banks saw an increase in demand for commercial real estate loans, a somewhat smaller net fraction than in the October survey. At foreign institutions, demand for this type of loan was reportedly unchanged in the January survey.

For several years, the January survey has asked banks to report their changes in various terms on commercial real estate loans over the past twelve months. This year's responses suggest a considerable easing in the terms on such loans, a pattern consistent with improving conditions in commercial real estate markets and the rapid expansion of commercial real estate loans in 2005. Almost 30 percent of domestic institutions, on net, indicated that they had reduced spreads of loan rates over the cost of funds in 2005. In addition, one-fourth of domestic respondents reported that they had raised the maximum size of the loans they were willing to extend, and about one-fifth of them indicated that they had increased loan-to-value ratios and the maximum loan maturity over the past year. At foreign institutions, 60 percent of respondents reported that they had narrowed spreads of loan rates over their cost of funds over the past twelve months. In addition, 30 percent of foreign institutions indicated that they had increased loan-to-value ratios over the same period.

Domestic and foreign institutions that had eased terms on commercial real estate loans in 2005 cited more-aggressive competition from other banks or nonbank lenders as the most important reason for having done so. Those respondents also pointed to improvements in the condition of, or the outlook for, the commercial real estate sector in the markets in which they operate as another important reason for having eased terms.

Lending to Households
(Table 1, questions 11-20) 

Credit standards on residential mortgage loans were reportedly unchanged over the past three months. On net, 44 percent of domestic banks reported weaker demand for mortgages to purchase homes, a notably larger net fraction than in the October survey.

More than 10 percent of domestic respondents—a somewhat larger fraction than in the October survey—indicated that their willingness to make consumer installment loans had increased over the past three months. Standards and most terms on credit card and non-credit-card consumer loans were reportedly little changed, on balance. However, about one-fourth of respondents indicated that they had increased the minimum percent of outstanding credit card balances required to be repaid each month.

Demand for consumer loans reportedly had weakened further over the past three months: About 30 percent of domestic banks, on net, saw weaker demand for such loans, up from about one-fifth in the October survey.

Bankruptcy filings spiked in September and early October in advance of the implementation of more stringent bankruptcy rules on October 17. Special questions queried domestic banks about the effects of that spike on charge-offs on credit card loans in the fourth quarter.¹ Among banks that experienced an increase in credit card charge-offs as the result of the new bankruptcy law, one-half indicated that the portion of fourth-quarter charge-offs attributable to this increase was less than 20 percent, and about one-fourth indicated that the portion was between 20 percent and 40 percent. These two groups of banks accounted for about 20 percent to 50 percent, respectively, of all credit card loans on the books of respondent banks at the end of the third quarter of 2005. Three institutions indicated that the portion of fourth-quarter credit card charge-offs attributable to the deadline-related increase in filings was between 80 percent and 100 percent. However, these institutions accounted for only 2 percent of all credit card loans on the respondents' books at the end of the third quarter.

About one-third of surveyed banks reported that between 60 percent and 100 percent of the increase in credit card charge-offs related to the new bankruptcy law was attributable to borrowers who filed ahead of the October 17 deadline but who would have filed anyway at some point in 2005 or during 2006. These banks held more than 50 percent of all credit card loans on the respondents' books at the end of the third quarter of 2005. Institutions that accounted for more than 25 percent of credit card loans on the respondents' books reported shares of 40 percent to 60 percent, and the remainder generally reported shares of 20 percent to 40 percent.

Special Questions on the Outlook for Loan Quality in 2006
(Table 1, questions 21-22; Table 2, question 11)

A final set of special questions asked banks about their expectations for the behavior of delinquencies and charge-offs on loans to businesses and households in 2006 under the assumption that economic activity progresses in line with consensus forecasts. On balance, the responses suggest that banks expect some modest deterioration in loan quality this year from recent very high levels. Between 25 percent and 30 percent of domestic respondents, on net, indicated that they anticipate that the quality of their loans to businesses?including both C&I and commercial real estate loans?will deteriorate somewhat in 2006. Notable net fractions of domestic institutions reported that they expect the quality of both credit card and non-credit-card consumer loans to deteriorate somewhat. About 40 percent of domestic respondents indicated that they anticipate the quality of their nontraditional residential mortgages to decline. By contrast, only a few respondents reported that they expect a worsening of the quality of their traditional residential mortgages in 2006. Foreign institutions indicated that, on net, they anticipate that the quality of their C&I loans will stabilize around current levels. Only two foreign institutions expected the quality of their commercial real estate loans to deteriorate somewhat this year.

¹ According to third-quarter Call Reports, the respondent banks accounted for 35 percent of all credit card loans on the books of domestic commercial banks as of September 30, 2005.