Senior Loan Officer Opinion Survey on
Bank Lending Practices

The May 1997 Senior Loan Officer Opinion Survey on Bank Lending Practices posed questions about bank lending standards and terms, loan demand by businesses and households, and expectations about charge-off rates for consumer and C&I loans. Fifty-nine domestic banks and 24 U.S. branches and agencies of foreign banks participated in the survey. The responses suggest that over the past three months domestic banks have become even more accommodative lenders to businesses but have tightened credit to households. They also indicate that U.S. branches and agencies of foreign banks have taken some steps to restrict credit supply.
        Citing stiff competition as their reason, large fractions of banks reported having eased terms on C&I and commercial real estate loans, though few banks reported having reduced standards for these loans. The responses on demand were mixed but suggest, on net, a slight strengthening for both types of business credit.
        Once again, both standards and terms for consumer loans were tightened, and banks reported less demand for these loans. Standards on home mortgages were about unchanged, and demand weakened a little.

Lending to Businesses   (Table 1, questions 1-13 and 28-30; table 2, questions 1-10)

Like the January survey results, the May results suggest that standards for commercial and industrial loans did not change much over the preceding three months but that terms eased further. Very few domestic respondents reported having changed standards on C&I loans to large and small businesses, and just over 10 percent of domestic respondents eased standards for middle-market customers (chart). By contrast, 10 percent of foreign respondents, on net, tightened standards for C&I loans. Regarding terms for large and middle-market borrowers, one-third of domestic respondents reported having narrowed the spreads of loan rates over market rates, about one-fourth reduced costs of credit lines and eased loan covenants, and about one-tenth increased credit lines or eased collateralization requirements. Terms for small borrowers were eased by only a few banks. Small net fractions of foreign respondents reported having tightened various terms on C&I loans. This represents a shift for foreign banks, which reported having eased terms on these loans for the past several surveys. Those banks that eased standards or terms on C&I loans said they had done so because of more-aggressive competition from other banks and from nonbank sources of credit. The banks that tightened cited a lower tolerance for risk and a deterioration in their current or expected capital position.
        On net, domestic respondents reported no change in demand for C&I loans from large customers, but about 10 percent reported increased demand from middle-market and small borrowers. However, about 15 percent, on net, of foreign respondents, which typically lend to large firms, indicated weaker demand for C&I loans. Banks attributed stronger demand to increased financing needs for plant and equipment investment, inventories, and, for larger borrowers, mergers and acquisitions. Weaker demand was attributed to customers switching to other sources of credit and increases in customers' internal funds.
        The May survey was the fourth consecutive survey to find little evidence of changes in the standards for commercial real estate loans (construction and land development loans and loans secured by nonfarm, nonresidential real estate) following the modest tightening of standards reported in late 1995 and early 1996. On net, about 5 percent of domestic respondents said that over the preceding three months they had eased their standards for these loans; but a similar fraction of foreign respondents said they had tightened their standards for these loans. With respect to terms on commercial real estate loans, about one-half of domestic banks and one-fifth of foreign banks reported having narrowed spreads over the preceding twelve months, but only small net fractions reported having changed other terms, including maximum loan size, maximum loan maturity, loan-to-value ratios, debt- service coverage ratios, and requirements for take-out financing.
        As with C&I loans, those banks that eased terms most commonly said they had done so because of increased competition from banks and nonbanks; many also cited the increased liquidity of these loans resulting from a more-developed secondary market for them and the improved condition of the commercial real estate industry. Ninety percent of the domestic banks and 60 percent of the foreign banks said that their competitors had eased their standards for or terms on these loans over the preceding twelve months. On net, about 10 percent of domestic respondents and nearly 40 percent of foreign respondents reported having experienced increased demand for commercial real estate loans.

Lending to Households   (Table 1, questions 14-21)

Extending a trend that began in early 1996, significant fractions of banks reported having tightened standards on consumer loans. Nearly one-half the banks said they had tightened standards for new credit card accounts over the preceding three months, and one-fifth reported having tightened standards on other consumer loans. Nevertheless, banks' willingness to make consumer installment loans was unchanged from three months ago (chart). The net fraction of banks more willing to make these loans has hovered near zero for the past six surveys. Forty percent of the respondents lowered credit limits on credit card lines, and about 15 percent raised spreads of loan rates over market rates. Terms on other consumer loans were about unchanged. On net, 15 percent of the respondents reported a decline in demand for consumer loans.
        Banks reported little change in their standards for approving mortgage applications of individuals to purchase homes. Ten percent more banks reported weaker demand for residential mortgages than reported stronger demand, but several of the banks said that demand was "substantially stronger," whereas none reported demand that was "substantially weaker."

Expectations for Charge-off Rates   (Table 1, questions 22-27)

Additional questions on the survey asked loan officers how they expected charge- off rates for consumer and C&I loans to change over the remainder of 1997. About one-third of respondents, on net, expected charge-off rates for consumer loans to go up, an eventuality most attributed to a greater willingness on the part of households to declare bankruptcy; somewhat fewer blamed worsening household financial conditions and aggressive solicitations by their bank for these loans. Those banks that foresaw a lower charge-off rate on consumer loans mentioned tighter standards for these loans. One-fourth of the banks, on net, expected charge-off rates for C&I loans to go up. Banks pointed to eased standards for these loans, a deterioration in business financial conditions, and a deterioration in the economy generally as the reasons for their outlook. Several banks also noted that recent declines in the gross charge-off rate on C&I loans would translate into fewer future recoveries, raising the net charge-off rate.

The report, with charts and tables, is available in Acrobat (PDF) format. Obtaining the Acrobat Reader

Charts (16 KB PDF)
Measures of lending practices from current and previous surveys
Chart data (ASCII)

Table 1 (43 KB PDF)
Summary of responses from U.S. banks

Table 2 (16 KB PDF)
Summary of responses from branches and agencies of foreign banks

Full report (84 KB PDF)