FRB: Senior Loan Officer Opinion Survey: April 2011

April 2011

The April 2011 Senior Loan Officer Opinion Survey on Bank Lending Practices

The April 2011 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 past three months. The survey also included sets of special questions on changes in the overall credit quality of potential business borrowers and on changes in the number of applications for new or increased credit card lines and in the quality of such applicants. This summary is based on responses from 55 domestic banks and 22 U.S. branches and agencies of foreign banks (hereafter referred to as foreign banks).¹

The April survey indicated that, on net, bank lending standards and terms generally had eased somewhat further during the first quarter of this year, and that the demand for commercial and industrial loans (C&I) and for commercial mortgages increased, while that for residential mortgages continued to decrease.²

Banks continued to ease standards and terms for C&I loans. The majority of respondents that had eased standards and terms on C&I loans cited increased competition from other banks and nonbank lenders as the most important reason for the easing. Some banks that had eased standards and terms also pointed to a more favorable or less uncertain economic outlook.

Regarding changes in standards and terms on loans to households, several large banks eased lending policies on credit card and auto loans, and the net fraction of banks that reported having become more willing to make consumer installment loans rose to its highest level since the first half of 1994.³ Moderate net fractions of banks reported a net easing of the spreads of auto loan rates over their own cost of funds, and roughly similar fractions of large banks also eased several other terms on such loans.

Demand for C&I loans from large and middle-market firms reportedly increased over the past three months.⁴ Responses indicating increases in demand for C&I loans from smaller firms were less widespread than for larger firms. Demand for commercial real estate (CRE) loans also reportedly increased, particularly at larger banks. In contrast, relatively large fractions noted that demand for each type of residential mortgage covered in the survey had declined. Demand for auto loans reportedly strengthened this quarter, while demand was little changed for credit card loans and other consumer loans.

Lending to Businesses
(Table 1, questions 1-9; Table 2, questions 1-9)

Questions on commercial and industrial lending. The April survey showed that about 15 percent of banks reported having eased standards on C&I loans to large and middle-market firms and to small firms in the first quarter, as did 20 percent of foreign banks. No domestic or foreign banks tightened standards on C&I loans during this period.

Positive net fractions of banks eased most loan terms on C&I loans for firms of all sizes. Loan spreads were eased by somewhat more respondents than in the previous quarter, with about 55 percent of domestic banks, on net, narrowing spreads over their cost of funds on loans to large and middle-market firms and 50 percent, on net, narrowing spreads on loans to small firms. Also, about 50 percent of foreign banks reported an easing of the spreads of loan rates over their own cost of funds. Somewhat smaller net fractions of domestic banks lowered the cost of credit lines and reduced the use of interest rate floors (a new loan term added to this survey) in lending to firms of all sizes. On net, about 30 percent of foreign banks reduced their use of interest rate floors. Moderate net fractions of larger domestic banks and foreign banks eased loan covenants, with several banks adding comments noting the reemergence of syndicated loans with few or no loan covenants.

Most respondents that had eased standards or terms on C&I loans cited increased competition from other banks and nonbank lenders as a reason for the changes. About 45 percent of respondents also cited a more favorable or less uncertain economic outlook--a smaller fraction than in the previous survey. About 35 percent noted increased liquidity in the secondary market for C&I loans. Only about 20 percent pointed to an increased tolerance for risk at their institution as a reason for easing, and only a few banks reported having reduced interest rate premiums on riskier loans.

A moderate net fraction of domestic respondents--about 25 percent--reported stronger demand for C&I loans from large and middle-market firms. However, as in the previous survey, a much smaller net fraction of banks (about 10 percent) reported stronger demand from small firms. Of the banks reporting stronger demand for C&I loans by firms of any size, substantial fractions indicated that the greater demand was due to an increase in customers' financing needs for inventories, merger and acquisition activity, and accounts receivable, as well as to a reduction in borrowing from other banks and nonbank sources. The most often cited reason for stronger demand noted by larger banks was greater demand for financing merger and acquisition activity, whereas for other banks it was a rise in financing needs for inventories. On net, about 35 percent of banks reported a pickup in inquiries from business borrowers about new or increased credit lines. Foreign banks also reported a slight improvement in demand, on net, and a moderate increase in inquiries regarding lines of credit.

Special Question on Changes in the Overall Credit Quality of Potential Business Borrowers. In response to a special question regarding changes in the overall credit quality of potential business borrowers over the past three months, about 55 percent of domestic respondents reported improvements in the overall credit quality of large and middle-market loan applicants, while about 35 percent of domestic respondents reported improvements, on net, in the overall credit quality of small firms that applied for loans.⁵ Large domestic banks were more upbeat than their smaller and foreign counterparts regarding improvements in the overall credit quality of business loan applicants, with about 75 percent of the large bank respondents reporting that the overall credit quality of large and middle-market applicants improved over the past three months.

Questions on commercial real estate lending. In the April survey, most domestic banks reported no change in their standards for approving CRE loans; however, a few large banks and foreign banks reportedly eased such standards somewhat. About 35 percent of domestic banks reported having seen increased demand for CRE loans--the strongest reading since the mid-1990s. The banks that indicated an increase in demand were almost all large domestic banks. Other domestic and foreign banks reported little change in demand for CRE loans on net.

Lending to Households
(Table 1, questions 10-26)

Questions on residential real estate lending. On net, standards on prime closed-end residential real estate loans and home equity lines of credit were about unchanged during the first quarter of 2011. As in the previous two surveys, about 10 percent of banks, on net, tightened standards on nontraditional mortgages. The tightening of standards on nontraditional mortgages primarily reflected changes at smaller banks; all larger banks left those standards about unchanged.

Moderate net fractions of banks reported weakening demand for both prime and nontraditional closed-end loans as well as for home equity lines of credit. Demand for closed-end loans has now declined for three consecutive quarters.

Questions on consumer lending. The net fraction of banks that reported having become more willing to make consumer installment loans registered its strongest reading since the first half of 1994.

For the first time in the survey, questions on standards and terms, as well as demand, for consumer loans were split into three separate categories: credit card, auto, and other consumer loans. On net, about 20 percent of banks reported having eased standards for approving credit card applications, and this easing was concentrated at the large banks. Terms were little changed for credit card loans, on balance, over the preceding three months. Standards for loans to purchase new and used autos were eased by about 15 percent of banks on net. As with credit card loans, this easing was concentrated at the large banks. Moderate net fractions of large banks also eased spreads and other terms on these loans. Other banks eased loan spreads, but left other loan terms and lending standards about unchanged. Banks reported little change, on net, on standards and terms for other consumer loans over the last three months.

About 25 percent of banks reported that demand for auto loans had strengthened on net. However, banks were somewhat split regarding changes in demand for credit card loans and other consumer loans, and on net they reported little change.

Special Questions on Changes in Credit Card Applications and in the Overall Credit Quality of Applicants. The April survey included two special questions about changes in applications for new or increased credit card lines and in the overall credit quality of applicants over the preceding three months. Only a modest net fraction of banks reported an increase in the number of credit card applications over the past three months. Moreover, just a small net percentage of banks reported an improvement in the credit quality of individuals or households submitting credit card applications during the same period.

¹ Respondent banks received the survey on or after March 29, 2011, and responses were due by April 12, 2011. Return to text

² For questions that ask about lending standards or terms, reported net percentages equal the percentage of banks that reported having tightened standards ("tightened considerably" or "tightened somewhat") minus the percentage of banks that reported having eased standards ("eased considerably" or "eased somewhat"). For questions that ask about demand, reported net fractions equal the percentage of banks that reported stronger demand ("substantially stronger" or "moderately stronger") minus the percentage of banks that reported weaker demand ("substantially weaker" or "moderately weaker"). Return to text

³ Large banks are defined as banks with assets greater than or equal to $20 billion as of December 31, 2010, and other banks as those with assets of less than $20 billion. Return to text

⁴ Large and middle-market firms are generally defined as firms with annual sales of $50 million or more and small firms as those with annual sales of less than $50 million. Return to text

⁵ This special question asked respondents to consider the average credit quality of applications that were denied as well as of those that were approved. Return to text

This document was prepared by Francisco Covas with the assistance of Ben Rump, Division of Monetary Affairs, Board of Governors of the Federal Reserve System.