FRB: Senior Loan Officer Opinion Survey: April 2009

April 2009

The April 2009 Senior Loan Officer Opinion Survey
on Bank Lending Practices

The April 2009 Senior Loan Officer Opinion Survey on Bank Lending Practices addressed changes in the supply of, and demand for, loans to businesses and households over the previous three months. The survey also included two sets of special questions: The first set asked banks about their expectations for delinquencies and charge-offs on existing loans to business and households; the second set queried banks about international trade finance. This article is based on responses from 53 domestic banks and 23 U.S. branches and agencies of foreign banks.¹

In the April survey, the net percentages of respondents that reported having tightened their business lending policies over the previous three months, although continuing to be very elevated, edged down for the second consecutive survey. In contrast, somewhat larger net percentages of domestic banks than in the January survey reported having tightened credit standards on residential mortgages. The net percentage of domestic respondents that reported having tightened their lending policies on credit card loans remained about unchanged from the January survey, whereas the net percentage that reported having tightened their policies on other consumer loans fell. Respondents indicated that demand for loans from both businesses and households continued to weaken for nearly all types of loans over the survey period, an exception being demand for prime mortgages, a category of loans that registered an increase in demand for the first time since the survey began to track prime mortgages separately in April 2007.

In response to the special questions on the outlook for loan quality, a significant majority of banks reported that credit quality for all types of loans is likely to deteriorate over the year if the economy progresses according to consensus forecasts. In response to the special questions on international trade finance, the majority of domestic institutions that provide such credit and a substantial fraction of foreign institutions reported having tightened standards over the previous six months.

Questions on Lending to Businesses

(Table 1, questions 1-8; Table 2, questions 1-8)

Commercial and industrial lending. On net, about 40 percent of domestic respondents, compared with around 65 percent in the January survey, reported having tightened their credit standards on commercial and industrial (C&I) loans to firms of all sizes over the previous three months. On balance, domestic banks have reported tightening their credit standards on C&I loans to large and middle-market firms for eight consecutive surveys and to small firms for ten consecutive surveys. Although 40 percent is still very elevated, the April survey marks the first time since January 2008 that the proportion of banks reporting such tightening fell below 50 percent. Similarly, the net percentages of domestic respondents that reported tightening various terms on C&I loans over the previous three months remained elevated but were slightly lower than those reported in the January survey. Specifically, about 80 percent of domestic banks, on balance, indicated that they had increased spreads of loan rates over their cost of funds for C&I loans to large and middle-market firms, compared with around 95 percent in January. About 75 percent of domestic respondents, compared with about 90 percent in January, indicated that they had increased such spreads for C&I loans to small firms. A significant majority of banks reported having charged higher premiums on riskier loans and having increased the costs of credit lines over the survey period.

U.S. branches and agencies of foreign banks also tightened their business lending stance further over the previous three months. On net, about 30 percent of foreign banks, compared with 65 percent in Janaury, reported tightening credit standards for C&I loans. As with their domestic counterparts, significant percentages of foreign banks further tightened various terms on C&I loans, although these percentages were somewhat lower than those in January. On balance, over 65 percent of foreign respondents reported an increase in premiums charged on riskier loans and in the cost of credit lines, and about 60 percent of foreign banks reported an increase in spreads of loan rates over their cost of funds.

Large majorities of both domestic and foreign banks reported a less favorable or more uncertain economic outlook, a worsening of industry-specific problems, and a reduced tolerance for risk as important reasons for tightening credit standards and terms on C&I loans. A substantial majority of foreign respondents also indicated that an increase in defaults by borrowers in public debt markets, decreased liquidity in the secondary market for business loans, and deterioration in their banks' expected capital position were important reasons for the change in C&I lending policies over the survey period.

On balance, about 60 percent of domestic banks reported a further weakening of demand for C&I loans from firms of all sizes over the previous three months, a proportion similar to that reported in the January survey. In contrast, foreign banks, on net, saw little change in demand over the survey period, compared with about 25 percent that reported weaker demand in the January survey.

All foreign respondents and 37 of the 38 domestic banks that saw weaker demand for C&I loans over the previous three months indicated that a decrease in their customers' needs to finance investment in plant or equipment was an important reason for the change in loan demand. Substantial majorities of the domestic institutions that had experienced such weaker demand also pointed to decreases in their customers' needs to finance inventories, accounts receivable, and mergers and acquisitions. In addition, about 35 percent of domestic respondents, on net, reported that inquiries from potential business borrowers had decreased during the survey period, a percentage similar to that in the January survey. In contrast, only about 5 percent of foreign respondents, on net, reported a decrease in such inquiries.

Commercial real estate lending. About 65 percent of domestic banks, on net, reported tightening their lending standards on commercial real estate (CRE) loans over the previous three months, compared with about 80 percent in the January survey. On balance, domestic banks have been tightening credit standards on CRE loans for 14 consecutive surveys, and the April survey marks the first time since October 2007 that the net proportion of banks reporting such tightening fell below 70 percent. About 35 percent of foreign branches and agencies also reported tightening their lending standards on CRE loans over the survey period. The demand for CRE loans weakened further at survey respondents over the previous three months. About 65 percent of domestic banks, on balance, reported weaker demand for CRE loans, the highest net percentage so reporting since the survey began tracking demand for CRE loans in April 1995. In contrast, the net proportion of foreign banks that reported a decrease in demand for CRE loans--about 35 percent--was somewhat smaller than that in the January survey.

Questions on Lending to Households

(Table 1, questions 9-18)

Residential real estate lending. In the April survey, somewhat larger fractions of domestic respondents than in the January survey reported having tightened their lending standards on prime and nontraditional residential mortgages. About 50 percent of domestic respondents indicated that they had tightened their lending standards on prime mortgages over the previous three months, and about 65 percent of the 25 banks that originated nontraditional residential mortgage loans over the survey period reported having tightened their lending standards on such loans. About 35 percent of domestic respondents saw stronger demand, on net, for prime residential mortgage loans over the previous three months, a substantial change from the roughly 10 percent that reported weaker demand in the January survey. About 10 percent of respondents reported having experienced weaker demand for nontraditional mortgage loans over the previous three months-a substantially lower proportion than in the January survey. Only two banks reported making subprime mortgage loans over the same period.

On net, about 50 percent of domestic respondents, down from roughly 60 percent in the January survey noted that they had tightened their lending standards for approving applications for revolving home equity lines of credit (HELOCs) over the previous three months. Regarding demand, about 30 percent of domestic banks, on net, reported weaker demand for HELOCs over the previous three months, slightly more than the proportion that had reported weaker demand in the January survey.

Consumer lending. Large percentages of domestic banks again reported a tightening of standards and terms on both credit card loans and other consumer loans over the previous three months. Nearly 60 percent of respondents indicated that they had tightened lending standards on credit card loans, about the same proportion as in the January survey. About 50 percent of respondents, down from 60 percent in the January survey, reported tightening standards on other consumer loans. About 50 percent of respondents reported having reduced the extent to which credit card accounts were granted to customers who did not meet their bank's credit-scoring thresholds, and a similar fraction reported pulling back from granting other kinds of consumer loans to such customers. Roughly 55 percent of the respondents, a somewhat higher proportion than in the January survey, reported having raised minimum required credit scores on credit card accounts over the previous three months. About 45 percent of respondents reported having raised minimum scores on consumer loans other than credit cards, and about 65 percent of banks, compared with 45 percent in the January survey, indicated that they had lowered credit limits to either new or existing credit card customers. In contrast to the substantial net tightening reported for consumer loan standards and terms, only about 5 percent of domestic banks, on net, indicated that they had become less willing to make consumer installment loans over the previous three months; this proportion is down from 15 percent in the January survey and 45 percent late last year. Regarding demand, about 20 percent of respondents, on net, indicated that they had experienced weaker demand for consumer loans of all types over the previous three months-substantially less that the percentage so reporting in the January survey.

Questions on Existing Credit Lines

(Table 1, question 19; Table 2, question 9)

The April survey repeated a special question from the January survey that queried banks on how, over the previous three months, they had changed the sizes of credit lines for existing customers for a number of account types. On balance, banks had continued to trim lines for both businesses and households. Regarding existing accounts for businesses, roughly 55 percent of domestic respondents, on balance, reported a decrease in the limits on CRE accounts--a proportion slightly lower than that reported in the January survey. About 55 percent of respondents indicated a decrease in the limits on credit lines extended to financial firms--a proportion slightly above that in the January survey. About 30 percent (about the same as in the January survey) indicated a decrease in credit limits on business credit card accounts, and roughly 40 percent (significantly more than in January) noted a decrease in the size of C&I credit lines. On net, a large proportion of foreign banks also decreased limits on credit lines extended to financial firms, CRE credit lines, and C&I credit lines. Regarding existing accounts for households, about 40 percent of domestic banks, on net (about the same as in January), reported having reduced the sizes of existing HELOCs, and approximately 50 percent (up from 35 percent in the January survey) reported having trimmed existing consumer credit card account limits.

Special Questions

(Table 1, questions 20-25; Table 2, questions 10-14)

The outlook for loan quality in 2009. A set of special questions asked banks about their expectations for delinquencies and charge-offs on loans to businesses and households in 2009, under the assumption that economic activity progresses in line with consensus forecasts. The vast majority of domestic and foreign respondents indicated that they expect deterioration in credit quality for all types of business and household loans. For each major category of loans considered in the survey, more than 70 percent of respondents, on net, reported that the quality of their bank's loan portfolio is likely to deteriorate this year, with more than 90 percent of domestic respondents reporting that loan quality is likely to deteriorate for nontraditional mortgages, credit card loans, and CRE loans.

International trade finance. A final set of special questions queried both domestic and foreign respondents about their provision of international trade finance (trade credit), which may consist of letters of credit guaranteeing payment, overdraft facilities, and other mechanisms for facilitating trade. About 65 percent of domestic and 80 percent of foreign respondents reported providing such credit. About 60 percent of the domestic respondents and nearly 45 percent of the foreign respondents that provided such finance reported tightening standards or terms over the previous six months. More than 80 percent of domestic banks that reported having tightened standards or terms cited a less favorable or more uncertain economic outlook abroad, increased concern about foreign country risk, worsening industry-specific problems, reduced tolerance for risk, and a less favorable or more uncertain economic outlook in the United States as reasons for the tightening. All of the eight foreign banks that reported tightening their standards and terms on international trade finance cited a less favorable or more uncertain economic outlook in the United States and abroad and an increase in concern about foreign country risk as important reasons for the tightening. On net, about 70 percent of domestic respondents and about 10 percent of foreign respondents reported experiencing weaker demand for trade credit over the previous six months.

¹Respondent banks received the survey on or after March 31, 2009, and their responses were due April 14, 2009. Return to text

This document was prepared by John Driscoll and Seung Jung Lee with the assistance of Robert Kurtzman, Division of Monetary Affairs, Board of Governors of the Federal Reserve System.