Senior Loan Officer Opinion Survey on
Bank Lending Practices

The November 1997 Senior Loan Officer Opinion Survey on Bank Lending Practices (covering, for the most part, changes over the past three months) posed questions about bank lending standards and terms, loan demand by businesses and households, collateralized loan obligations, the causes of the recent rise in measured spreads on commercial and industrial loans, and the renegotiation of consumer loans on concessionary terms.¹
        Increased competition for business credit apparently led large percentages of the domestic respondents to ease terms on commercial and industrial loans over the past three months, and a small percentage of them to ease lending standards. By contrast, a few of the branches and agencies of foreign banks indicated that they had tightened lending standards and some loan terms. Demand for business loans and commercial real estate loans strengthened at many of the respondents.
        Banks again reported tighter standards on consumer loans, but the percentage that tightened was lower than it was earlier in the year. Moreover, several banks expressed increased willingness to make these loans. The respondents indicated that demand for consumer loans had softened slightly on net.

Lending to Businesses
 (Table 1, questions 1-9; table 2, questions 1-7)

A small net percentage of the domestic respondents--about 5 percent--reported easing standards for commercial and industrial loans to large and middle market firms and to small businesses over the past three months (chart). About 40 percent, on net, narrowed spreads of C&I loan rates over their bank's cost of funds on loans to borrowers in both size categories. Smaller percentages eased other terms, including the costs of credit lines, the maximum size of credit lines, and loan covenants. Only a couple of banks eased collateralization requirements. The easing of loan terms was somewhat more widespread in November than earlier this year, especially for loans to small businesses. As in the earlier surveys, those banks that eased pointed to increased competition from other banks and from nonbank lenders as the main reasons for the changes.
        In contrast, the branches and agencies of foreign banks reported a small net tightening of standards and a tightening of some loan terms for commercial and industrial loans. Those respondents tightening standards or terms most frequently indicated that they were doing so because of a reduced tolerance for risk by their institution. While this reduced tolerance for risk might reflect the recent turbulence in world financial markets, the less accommodative stance of the foreign respondents is also consistent with the last two surveys. In August and May, the foreign respondents were less likely than the domestic respondents to report easier terms or standards and more likely to report tighter ones. The November responses are also consistent with the slower growth in business loans at foreign branches and agencies than at large domestic banks since the second quarter.
        The survey results suggest a broad rise in the demand for commercial and industrial loans. Nearly 20 percent of the domestic banks, on net, reported stronger demand from large and middle-market borrowers, roughly the same as the fraction reporting a pickup in demand by small businesses (chart). A similar net percentage of the foreign branches and agencies reported a rise in business loan demand. Respondents attributed the increased demand to greater customer financing needs for plant and equipment and also for mergers and acquisitions. In addition, some of the foreign respondents pointed to a shift in demand from other sources of finance.
        The survey results show mixed changes in commercial real estate loan standards, while demand for such loans picked up sharply. Less than 10 percent of the domestic banks reported easier commercial real estate lending standards, and the foreign respondents posted a small net tightening. About a third of both the domestic and foreign respondents indicated that demand for commercial real estate loans had strengthened.

Lending to Households
 (Table 1, questions 10-17)

The November survey was the eighth in a row to show a net tightening of standards for consumer loans. However, the net percentage of banks tightening was lower in the August and November surveys than earlier in the year, suggesting that many banks have completed adjustments to take account of the deterioration in the performance of these loans that occurred over the past three years. In the latest survey, 25 percent of the respondents reported tighter standards for credit card applications and 10 percent reported tighter standards for other consumer loans. Both percentages were little changed from the August survey. By contrast, these percentages peaked at nearly 50 and 25 percent, respectively, late last year.
        Changes in consumer loan terms were mixed. Banks tightened credit limits and increased spreads on credit card accounts. On other types of consumer loans, however, some banks increased maximum maturities and cut spreads. Ten percent of the banks, on net, said that their willingness to make consumer installment loans had increased over the past three months, about the same as in August (chart). Consumer loan demand was reportedly a bit weaker on net.
        Banks reported a very small net tightening of standards for approving applications for mortgage loans to purchase homes. More than a quarter of the respondents reported increased demand for these loans.

Collateralized Loan Obligations
 (Table 1, questions 18-20; table 2, questions 8-10)

Recently, several large banks have established programs under which they package and sell securities backed by commercial and industrial loans. These securities are commonly called "collateralized loan obligations" or CLOs. ²   The November survey asked the respondents about such programs. Four of the domestic banks and six of the foreign branches and agencies reported having programs to sell collateralized loan obligations, and three domestic respondents and four foreign respondents indicated that they would have such programs within a year. Thus, more than a tenth of the domestic respondents and nearly half of the foreign respondents will likely have issued CLOs by the end of next year. Moreover, nearly a third of the domestic respondents and a fifth of the foreign respondents indicated that they were considering establishing a CLO program. The respondents attributed the recent interest in CLOs to a desire by banks to deploy their capital efficiently by moving relatively low risk loans off their balance sheets. They also noted that the continued development of the asset-backed security market has reduced the cost of such programs, and that, given current market interest rates, CLOs can reduce funding costs.
        The seven domestic respondents that have or plan to have a program each intend to securitize an average of about $2.2 billion of commercial and industrial loans over the coming year, while the ten foreign respondents each intend to securitize an average of $2.0 billion. Thus, in sum, these respondents plan to securitize $35 billion of commercial and industrial loans. While this sum is only about 4 percent of the more than $800 billion of bank commercial and industrial loans, these securitizations could cut the growth rate of business loans on banks' books, which has run at about an 8 percent annual rate in recent quarters, by about a half.

Reasons for the Rise in Measured Spreads on Large Business Loans
 (Table 1, questions 21-22; table 2, questions 11-12)

According to the Federal Reserve's quarterly Survey of Terms of Business Lending, spreads of rates on larger business loans (those of $1 million or more) over market rates have widened over the past year. This result appears to be at odds with press reports and the results of past Senior Loan Officer Surveys, which suggest that spreads have narrowed. The November survey asked the respondents what factors likely contributed to this divergence. They indicated that the rise in measured spreads on commercial and industrial loans found by the Survey of Terms of Business Lending most likely occurred despite a narrowing of spreads on loans of a given risk, and reflected a more-than-offsetting rise in the average risk of new loans. They attributed the rise in risk to an increased demand for riskier credits, especially those for mergers and acquisitions. In addition, some respondents reported that their bank had decided to accept increased risk in order to earn higher returns.

Concessionary Terms on Household Debt Repayment Plans
(Table 1, questions 23-27)

In recent years the number of households contacting credit counseling services has increased substantially, as has the number of households establishing debt repayment plans with their creditors with the assistance of such services. The November survey asked banks about their willingness to agree to concessionary terms on consumer loans as a part of a debt repayment plan. The responses showed a widespread willingness to provide concessionary terms and an increase in the use of concessions in recent years. More than two-thirds of the respondents indicated that they were willing to agree to "some" concessions (perhaps including reduced late fees, lower interest rates, or longer repayment periods) as a part of a debt repayment plan, and a couple of banks said they were willing to make "substantial" concessions. Less than 10 percent of the respondents were completely unwilling to make concessions. Generally, the respondents indicated that the fraction of their banks' consumer loan outstandings restructured on concessionary terms as a part of a debt repayment plan was fairly small: either less than 1 percent or between 1 and 3 percent of outstandings. Half the respondents indicated that this percentage had increased over the past three years. In part, the rise may reflect a greater willingness on the part of banks to make concessions. Nearly half of the banks were more willing to make such concessions today than they were three years ago.
        Somewhat surprisingly, many of the banks apparently restructure consumer loans on concessionary terms directly, rather than through a credit counseling service. Only 20 percent of the respondents indicated that debt repayment plans were arranged through a service "in most cases," and about 15 percent reported that counseling services were "rarely or never used." A majority of the respondents indicated only that arrangements were "sometimes" made through a counseling service.

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

Charts (17 KB PDF)
Measures of lending practices from current and previous surveys
Chart data (ASCII)

Table 1 (35 KB PDF)
Summary of responses from U.S. banks

Table 2 (17 KB PDF)
Summary of responses from branches and agencies of foreign banks

Full report (78 KB PDF)