Senior Loan Officer Opinion Survey on
Bank Lending Practices

The January 1998 Senior Loan Officer Opinion Survey on Bank Lending Practices (covering, for the most part, changes over the past three months) posed the usual questions bearing on the supply of and demand for bank loans to businesses and households. Additional questions targeted changes in the sensitivity of respondents' loan quality to an economic slowdown, changes in standards and terms on home equity loans, and lending to affiliates or subsidiaries of East Asian firms.

Domestic respondents indicated little change in standards on loans to businesses, although once again a fairly large percentage narrowed yield spreads. By contrast, foreign respondents appear to be pulling back from business lending, with many reporting tighter standards and terms. Both domestic and foreign respondents took steps to restrict lending to U.S. affiliates of non-Japanese East Asian firms. At the same time, loan demand from U.S. affiliates of Japanese firms increased.

Many banks are still tightening standards on consumer loans, but few said that their willingness to make these loans had changed. Several banks eased terms and standards on home equity loans, while standards for residential mortgage loans were about unchanged. Demand for residential mortgages increased at a large percentage of respondents.

Special questions asked respondents about the change over the last two years in their customers' ability to meet their debt obligations during a period of economic weakness. The responses differed widely; on balance a few more banks said that, overall, their loan portfolio had become more vulnerable to a downturn than said it had become less vulnerable.

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

The survey results suggest somewhat less easing of business loan standards and terms than did last year's surveys. Among the domestic respondents, few banks indicated any change in standards on loans to small or to larger businesses, and the numbers that did indicate a change are about offsetting. Recent surveys had found small fractions of banks easing business lending standards. For customers in both size categories, about 25 percent of the domestic respondents reported some narrowing of yield spreads; for loans to large borrowers, this was a somewhat smaller percentage than in recent surveys. Less than 10 percent eased other terms, such as the size and cost of credit lines and loan covenants, while collateralization requirements were tightened slightly, on net. In general, more banks reported having eased these terms on recent surveys than did so in January.

Many branches and agencies reported curtailing their lending. More than one-third of the branches and agencies reported tighter standards on C&I loans, and more than half widened spreads. Significant fractions also decreased the size and increased the cost of credit lines. The respondents attributed the tightening to a weakening of their parents' current or expected capital position.

On net, about 25 percent of the domestic banks experienced increased demand for business loans from larger firms, and 15 percent reported stronger demand from small firms. Most frequently, the increased demand was attributed to merger and acquisition funding needs, but the need for plant and equipment and inventory financing was also cited. The importance accorded to inventory financing needs was about the same as that reported in the November survey and a little less than that in the August survey. A few branches and agencies, on net, reported a pick- up in business loan demand, attributing the rise to the same factors as the domestic respondents.

Less than 10 percent of the domestic respondents, on net, eased standards on commercial real estate loans, about the same as in November. By contrast, a net 12 percent of the foreign respondents tightened standards on these loans. Large net fractions of the participants--two-fifths of the domestic and one-third of the foreign respondents--experienced increased demand for these loans, about the same as in the November survey.

Lending to Households
(Table 1, questions 10-19)

The responses concerning consumer loans resembled those on recent surveys. Equal numbers of banks expressed more as expressed less willingness to make consumer installment loans, about 20 percent tightened standards on credit card loans, and 15 percent tightened standards on other consumer loans. While the current survey is the ninth in a row to find significant net percentages of banks tightening standards on consumer loans, the percentages have tailed off over the past two years. The survey reveals little evidence of any change in consumer loan terms, aside from a tightening of credit limits on credit card accounts.

Standards applied to mortgage applications were about unchanged. Many banks-- three-fifths--reported increased demand for these loans. Even though this question specifically refers to mortgages to purchase homes, the large number of respondents indicating increased demand may reflect, in part, the spike in refinancing in January.

Special questions found some evidence of eased standards and terms for home equity loans. Between 15 percent and 20 percent of the respondents, on net, eased standards on these loans over the past year. Similar percentages reduced fees and raised maximum loan-to-value ratios; somewhat smaller percentages narrowed spreads and lengthened maturities. The responses suggest a degree of easing somewhat greater than found by the January 1997 survey.

Lending to Affiliates and Subsidiaries of East Asian Firms
(Table 1, questions 22-26; table 2, questions 8-12)

The recent financial difficulties of many East Asian firms have raised the possibility that lenders may be exercising greater caution in dealing with the U.S. affiliates of such firms. In fact, the survey found a widespread tightening of standards and terms on loans to nonbank U.S. affiliates of Asian firms; the survey did not ask about affiliates of Japanese firms. Three-quarters of the domestic respondents and all of the branches and agencies had tightened their standards on loans to nonbank affiliates or subsidiaries of Korean firms. Only slightly fewer tightened standards on loans to non-Korean (and non-Japanese) firms. All or nearly all of the survey participants had tightened terms on loans to affiliates of Asian (non-Japanese) firms, including the size and cost of credit lines, yield spreads, loan covenants, and collateralization requirements.

In the last few months, Japanese banks have been under pressure to simultaneously recognize loan losses and improve their financial condition. These pressures may have reduced the supply of credit in Japan, possibly leading to a reduction in funding by Japanese parents to their nonbank U.S. affiliates or subsidiaries. The survey did find that about 30 percent of the domestic respondents, on net, and one-half of the branches and agencies had experienced increased loan demand from these firms. However, most of those institutions experiencing increased demand attributed it to reduced attractiveness of other sources of funds. Reduced funding from parent firms was cited much less often, although still widely, as a reason for the increased demand. Nevertheless, when increased loan demand is the result of substitution away from alternative sources of funds, it may be difficult for respondents to know the alternative source.

Sensitivity of Loan Performance to a Period of Economic Weakness
(Table 1, questions 20-21)

For the past couple of years, this survey and other sources have reported an easing by banks of standards and terms for business credit and a tightening for consumer credit. Special questions in the current survey asked respondents to evaluate the effect that these changes have had on the ability of their various customer groups to meet debt obligations during a period of economic weakness. Banks' responses differed fairly widely. More than 20 percent of the respondents, on net, felt that their commercial real estate borrowers' ability to weather a downturn had improved over the past two years. By contrast, on net about 15 percent felt that their credit card customers, and more than 10 percent that their other consumer loan borrowers, were in worse shape. It may be that the tightening of standards on consumer loans has not offset the deteriorating condition of some existing customers at these institutions. Regarding commercial and industrial and residential real estate borrowers, responses were quite dispersed, with fairly large percentages of banks assessing their borrowers to be in better condition and roughly equal percentages seeing deterioration. Looking at their loan portfolios overall, about 25 percent of the loan officers judged their banks' aggregate charge-off and delinquency rates to be more sensitive to a downturn than they were two years ago, and about 15 percent felt this sensitivity had declined.

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

Charts (15 KB PDF)
Measures of lending practices from current and previous surveys
Chart data (ASCII)

Table 1 (14 KB PDF)
Summary of responses from U.S. banks

Table 2 (27 KB PDF)
Summary of responses from branches and agencies of foreign banks

Full report (59 KB PDF)