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The July 2020 Senior Loan Officer Opinion Survey on Bank Lending Practices

The July 2020 Senior Loan Officer Opinion Survey on Bank Lending Practices addressed changes in the standards and terms on, and demand for, bank loans to businesses and households over the past three months, which generally corresponds to the second quarter of 2020.¹

Regarding loans to businesses, respondents to the July survey indicated that, on balance, they tightened their standards and terms on commercial and industrial (C&I) loans to firms of all sizes.² Banks reported weaker demand for C&I loans from firms of all sizes. Meanwhile, banks tightened standards and reported weaker demand across all three major commercial real estate (CRE) loan categories—construction and land development loans, nonfarm nonresidential loans, and multifamily loans—over the second quarter of 2020.

For loans to households, banks tightened standards across all categories of residential real estate (RRE) loans and across all three consumer loan categories—credit card loans, auto loans, and other consumer loans—over the second quarter of 2020 on net. Banks reported stronger demand for all categories of RRE loans and weaker demand for all categories of consumer loans.

Banks also responded to a set of special questions inquiring about the current level of lending standards relative to the midpoint of the range over which banks’ standards have varied since 2005. Banks, on balance, reported that their lending standards across all loan categories are currently at the tighter end of the range of standards between 2005 and the present.

Lending to Businesses

(Table 1, questions 1–12; table 2, questions 1–9)

Questions on commercial and industrial lending. Over the second quarter, major net shares of banks reported having tightened standards for C&I loans to both large and middle-market firms and to small firms.³ At the same time, major net shares of banks increased the use of interest rate floors, collateralization requirements, loan covenants, premiums charged on riskier loans, and loan spreads over the bank’s cost of funds, and significant net shares of banks tightened all other lending terms across firms of all sizes.⁴ Meanwhile, a major net fraction of foreign banks tightened standards for C&I loans. Major net shares of foreign banks reported having tightened the premiums charged over riskier loans and the costs of credit lines, while significant net shares of foreign banks reported having tightened the maximum size of credit lines, the maximum maturity of loans or credit lines, the spreads of loan rates over the bank’s cost of funds, the loan covenants, the collateralization requirements, and the use of interest rate floors.

Major net shares of banks that reported reasons for tightening lending standards or terms cited a less favorable or more uncertain economic outlook, worsening of industry-specific problems, and reduced tolerance for risk as important reasons for doing so. Significant net shares of banks also mentioned deterioration in the bank’s current or expected capital position; less aggressive competition from other banks or nonbank lenders; decreased liquidity in the secondary market for C&I loans; and increased concerns about the effects of legislative changes, supervisory actions, or changes in accounting standards.

Regarding demand for C&I loans over the second quarter, a significant net share of banks reported weaker demand for C&I loans to firms of all sizes. In addition, a significant net share of banks reported that the number of inquiries from potential borrowers decreased over the second quarter. Meanwhile, a moderate net fraction of foreign banks reported that demand for C&I loans strengthened, and a modest net fraction of foreign banks reported that the number of inquiries from potential borrowers increased.

Major net shares of banks that reported weaker demand cited a decrease in customers’ inventory financing need, a decrease in customers’ accounts receivable financing needs, a decrease in customers’ investment in plant or equipment, and a decrease in customers’ merger or acquisition financing needs. Meanwhile, significant net shares of banks reported an increase in customers’ internally generated funds and a decrease in customers’ precautionary demand for cash and liquidity as important reasons for weaker demand.

Questions on commercial real estate lending. Major net shares of domestic banks tightened standards on all three CRE loan categories over the second quarter. Meanwhile, major net shares of domestic banks reported weaker demand for all three CRE loan categories during this period. Similarly, major net shares of foreign banks tightened standards on CRE loans and reported weaker demand for such loans.

Lending to Households

(Table 1, questions 13–26)

Questions on residential real estate lending. Over the second quarter, major net shares of banks tightened standards for all RRE loan categories except for subprime residential mortgage loans, for which a significant net fraction of banks reportedly tightened lending standards.⁵

Regarding demand for RRE loans over the second quarter, a major net share of banks reported having experienced stronger demand for GSE-eligible residential mortgages, and significant net shares of banks reported having experienced stronger demand for most of the remaining categories of RRE loans. Demand was reportedly weaker only for home equity lines of credit (HELOCs).

Questions on consumer lending. Over the second quarter, major net shares of banks tightened lending standards on all categories of consumer loans. Major net fractions of banks also tightened important terms on credit card loans, including credit limits and minimum credit scores required. In contrast, a modest net share of banks reportedly reduced the minimum percent of outstanding balances required to be repaid each month. Meanwhile, significant net shares of banks tightened most surveyed terms on auto loans.⁶

Regarding demand for consumer loans over the second quarter, a major net fraction of banks experienced weaker demand for credit card loans, and significant net fractions of banks experienced weaker demand for auto and other consumer loans.

Special Questions on Current Level of Banks’ Lending Standards

(Table 1, question 27; table 2, question 9)

The July 2020 survey included a set of special questions that asked respondents to describe the current levels of lending standards at their bank. Specifically, respondents were asked to consider the range over which their lending standards have varied between 2005 and the present and to report where the level of standards currently is relative to the midpoint of that range.

Major shares of banks reported that, on net, their current levels of lending standards for all categories of C&I loans are at the tighter ends of their respective ranges since 2005. In contrast, in the July 2019 survey, net shares of banks reported being at the easier ends of the ranges since 2005 for all categories of C&I loans. The change in the tightening stance for all C&I loan categories relative to the range since 2005 is consistent with the responses in the current and April 2020 surveys, where major and significant net shares of banks, respectively, reported tightening lending standards for all C&I loan categories.

Among foreign banks, major net fractions reported that their current levels of lending standards for investment-grade and below-investment-grade non-syndicated loans are at the tighter ends of their historical ranges. Meanwhile, significant net fractions of banks reported that their current levels of lending standards for investment-grade and below-investment-grade syndicated loans are at the tighter ends of their historical ranges.

For CRE loans, major net fractions of domestic and foreign banks reported that the current levels of their standards for all major categories of these loans are at the relatively tighter ends of the ranges that have prevailed since 2005 on balance. Larger net shares of domestic and foreign banks reported being at the tighter ends now compared with the July 2019 survey across CRE loan categories.

Regarding RRE loans, banks reported that lending standards for all RRE loan categories remained at the relatively tighter ends of the ranges of those standards since 2005 on balance. HELOCs make up the category whose level was most consistently reported as being tight, with a major net share of banks reporting that standards are currently at the tighter end of the range since 2005. Additionally, major net shares of banks reported relatively tight standards on jumbo residential loans. The net shares of banks that reported their lending standards were at the relatively tighter ends of the ranges since 2005 are larger across most RRE loan types compared with the July 2019 survey.

On balance, major net shares of banks reported that the levels of their standards on credit card loans to prime and subprime borrowers are currently at the relatively tighter ends of their respective ranges since 2005. For auto loans, major and significant net shares of banks reported that the level of their standards to subprime and prime borrowers, respectively, are currently at the relatively tighter ends of their ranges since 2005. Meanwhile, a major net share of banks reported that the level of their standards for consumer loans other than credit card and auto loans is at the tighter end of the range since 2005.

The net shares of banks reporting that their standards are currently at the tighter end of the range since 2005 have increased across all consumer loan categories relative to last year.

This document was prepared by Horacio Sapriza, with the assistance of Andrew Castro, Division of Monetary Affairs, Board of Governors of the Federal Reserve System.

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