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

Current 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 July 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. Special questions in the survey addressed domestic banks' holdings of subprime residential mortgages and non-traditional residential mortgage products. In addition, the survey queried domestic banks about the change in the demand for residential real estate loans to finance homes for investment purposes. This article is based on responses from fifty-six domestic banks and seventeen foreign banking institutions.

In the July survey, domestic and foreign institutions indicated that they had eased lending standards and terms on commercial and industrial (C&I) loans somewhat further. Domestic banks, however, reported that they had tightened lending standards on commercial real estate loans over the previous three months, while foreign banks noted that standards on such loans were unchanged. Demand for both C&I and commercial real estate loans was reportedly about unchanged in the July survey. In the household sector, a small net fraction of domestic respondents indicated that they had eased credit standards on residential mortgages over the previous three months, while standards and terms on consumer loans were reportedly little changed. Significant net fractions of domestic institutions noted that demand for both mortgages to purchase homes and consumer loans had weakened further.

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

In the July survey, domestic institutions reported a further easing of standards and terms on C&I loans. On net, about 10 percent of domestic respondents indicated that they had eased credit standards on such loans to large and middle-market firms over the previous three months, roughly the same percentage as in the April survey. About 40 percent of domestic institutions—a significantly smaller net fraction than in April—noted that they had trimmed spreads of loan rates over their cost of funds for such firms. About one-fifth of domestic banks—a notably smaller net percentage than in the previous survey—reported that they had reduced the costs of credit lines, and smaller net fractions of domestic respondents indicated that they had eased loan covenants and increased the maximum size of credit lines that they are willing to extend to their business borrowers.

Credit standards on C&I loans to small firms were reportedly little changed, on balance, in the July survey. However, about one-fifth of domestic institutions, on net, indicated that they had trimmed spreads of loan rates over their cost of funds for such firms over the same period. Other loan terms were generally little changed.

Almost one-fifth of U.S. branches and agencies of foreign banks, on net, reported that they had eased their standards on C&I loans during the survey period. Considerable net fractions of these institutions also indicated that they had eased loan covenants, trimmed spreads of loan rates over their cost of funds, and reduced the cost of credit lines.

Nearly all domestic and all foreign institutions that reported having eased their lending standards and terms in the July survey pointed to more-aggressive competition from other banks or nonbank lenders as the most important reason for having done so. Notable net percentages of domestic respondents also cited increased liquidity in the secondary market for these loans, a more favorable or less uncertain economic outlook, and increased tolerance for risk as reasons for having eased credit standards or terms on C&I loans.

Demand for C&I loans was reportedly unchanged, on net, in the July survey at both domestic and foreign institutions. Among domestic banks that saw stronger demand for C&I loans, almost 90 percent explained the strengthening by pointing to increased needs to finance mergers and acquisitions, while 80 percent cited borrowers' increased needs to finance investment in plant or equipment. Among domestic institutions that experienced weaker demand for C&I loans, about 85 percent attributed the softening to borrowers' decreased needs to finance investment in plant or equipment, while significant net fractions pointed to increases in customers' internally generated funds, decreased need for inventory financing, and a shift in customer borrowing to another bank or to nonbank sources of credit. Regarding future business, both domestic and foreign institutions reported that the number of inquiries from potential business borrowers was little changed over the previous three months.

Commercial Real Estate Lending
(Table 1, questions 7-8; Table 2, questions 7-8)

On balance, 10 percent of domestic banks indicated that they had tightened lending standards on commercial real estate loans over the previous three months. By contrast, foreign respondents noted that they had not changed standards on such loans over the same period. Both domestic and foreign institutions reported that demand for commercial real estate loans was little changed in the July survey.

Lending to Households
(Table 1, questions 9-25) 

On net, about 10 percent of domestic institutions indicated that they had eased credit standards on residential mortgage loans over the past three months, the same fraction as in the April survey. In line with other evidence of a slowdown in housing activity this year, domestic institutions reported that demand for mortgages to purchase homes had continued to weaken over the previous three months. About 60 percent of respondents saw weaker demand for such loans, a significantly larger net fraction than in the April survey.

Only a few domestic respondents 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 in the July survey, on balance. Demand for consumer loans weakened further over the past three months: About 40 percent of domestic banks saw weaker demand for such loans, a somewhat larger net fraction than in the April survey.

The July survey included a set of special questions on domestic banks´ holdings of subprime residential mortgages and non-traditional residential mortgage products, as well as on changes in the credit quality of such loans.¹ The subprime category of residential mortgages includes loans made to borrowers that displayed one or more of the following characteristics at the time of loan origination: weakened credit histories stemming from payment delinquencies, charge-offs, judgments, or bankruptcies; reduced repayment capacity as measured by credit scores or debt-to-income ratios; and incomplete credit histories.² Non-traditional residential mortgage products include—but are not limited to—adjustable-rate mortgages with multiple payment options, interest-only mortgages, and "Alt-A" products such as mortgages with limited income verification and mortgages secured by non-owner-occupied properties.

Holdings of subprime residential mortgages were generally small for the respondent banks. Of the thirty domestic banks with subprime residential mortgages on their books, nearly three-fourths indicated that such mortgages accounted for less than 5 percent of their residential mortgages, and one-fifth of these institutions noted that the share of such products was between 5 percent and 15 percent. The remainder of banks reported a share that was more than 20 percent. When the responses were weighted by dollar volume, banks that reported a share of less than 5 percent accounted for nearly 60 percent of all residential mortgages on the books of those banks that responded to this special question on subprime residential mortgages at the end of the first quarter. Those institutions that reported a share between 5 percent and 15 percent accounted for 22 percent of all such mortgages.

A modest net fraction of respondents indicated that the quality of their subprime residential real estate portfolios—as measured by delinquencies and charge-offs—had deteriorated somewhat over the past twelve months, a response consistent with aggregate measures suggesting some deterioration in subprime loan performance in recent quarters. Nonetheless, three institutions reported that the quality of their portfolios of such products had performed somewhat better than they had expected over that period, while only one bank noted that the quality of its portfolio had performed somewhat worse than anticipated. About 10 percent of institutions, on net, indicated that they had tightened price-related terms on such mortgages over the same period. Looking forward, about one-third of respondents reported that they anticipate that the quality of the subprime residential mortgages currently on their books will deteriorate somewhat over the next twelve months, and the rest expect loan quality to likely stabilize around current levels.

The panel banks had more-substantial holdings of residential mortgages that could be categorized as non-traditional. Among the forty-eight domestic banks that responded to this special question, about 45 percent reported that the share of such mortgages currently on their books was less than 5 percent, and about 20 percent of respondents noted that the share of such products was between 5 percent and 15 percent. Seven institutions, however, indicated that non-traditional mortgage products accounted for more than 30 percent of the residential mortgages currently on their books. When the responses were weighted by dollar volume, banks that reported a share of less than 5 percent accounted for 10 percent of all residential mortgages on the books of those banks that responded to this special question on non-traditional residential mortgage products at the end of the first quarter. Those institutions that reported a share between 5 percent and 15 percent accounted for more than 50 percent of all such mortgages. The seven institutions that indicated a share greater than 30 percent accounted for less than 10 percent of all residential mortgages on the books of the respondents.³

A modest net percentage of respondents indicated that the quality of their portfolio of non-traditional residential mortgage products—as measured by delinquencies and charge-offs—had improved over the past twelve months. Eight banks reported that the quality of their portfolios of such products had performed better than had been expected, and only one institution indicated that the quality of its portfolio had performed somewhat worse than had been anticipated. Nonetheless, about 10 percent of institutions, on balance, noted that they had tightened price-related terms on such mortgage products over the same period. Looking forward, nearly 30 percent of banks, on net, indicated that they expect the quality of the non-traditional residential mortgage products currently on their books will deteriorate somewhat over the next twelve months. These banks accounted for more than 50 percent of all residential mortgages on the books of respondents at the end of the first quarter.

The July survey also included a special question on changes in demand for residential real estate loans used to finance homes for investment purposes.⁴ Almost 20 percent of domestic institutions reported stronger demand for such loans over the past twelve months, while 30 percent noted that demand had weakened over the same period.

¹The number of banks that responded to the set of special questions varied from twenty-nine to forty-eight depending on the question. According to first-quarter Call Reports, the respondent banks accounted for between 53 percent and 63 percent of all residential real estate loans on the books of domestic commercial banks as of March 31, 2006.