Senior Loan Officer Opinion Survey on
Bank Lending Practices

The May 1998 Senior Loan Officer Opinion Survey on Bank Lending Practices, primarily covering 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: the recent growth in bank securities holdings, residential mortgage loans, and loans to real estate investment trusts (REITs); banks' handling of possible risks owing to the year-2000 preparedness of their customers; and the effects of economic problems in Asia on the provision of trade finance to firms in the affected economies.

The results of the survey indicate that the domestic respondents generally remained eager to make loans to businesses, while the foreign respondents had become less eager. A few of the domestic respondents reported easing standards on loans to businesses, and a large percentage cut their spreads on such loans. These results are similar to those reported last year; in January, lending standards were about unchanged, on net, and fewer banks reported easing loan terms. Foreign branches and agencies continued to pull back from business lending, with many of them reporting tighter standards and terms on the May survey. Lending to REITs was reported to have expanded rapidly over the past year, reflecting heavy demand for funding. A number of domestic and foreign respondents reported increased requests for trade finance from firms in emerging economies in Asia affected by the financial problems in the region, but most of the banks that had provided such finance in the past indicated that they were less willing to do so now.

The survey showed small mixed changes in standards and terms on loans to households. While some banks tightened standards and terms on credit card loans, the number doing so was smaller than in past surveys. The fraction of banks tightening standards on other consumer loans also declined, and terms on such loans were about unchanged, on net. A few banks reported having eased standards for residential mortgage loans in May, following no net change in the January survey.

Responses to a special question suggested that the recent rapid growth in securities holdings reflected banks' efforts to increase leverage in order to boost returns on equity. Other special questions indicated that banks have not generally cut back on lending to customers because of possible year-2000 problems, although many are now including year-2000 related covenants in some loan contracts.

Lending to Businesses
(Table 1, questions 1-9 and 26-31; table 2, questions 1-7 and 14-19)

The number of U.S. banks reporting easier standards and terms for business borrowers on the latest survey remained in the range seen over the past several quarters. A few banks, on net, reported having eased standards for large and middle market firms, while only one bank reported having done so for small businesses. About a third of the respondents, on net, narrowed yield spreads for larger firms, a considerably higher share than in the January survey. As in January, about a quarter reported narrower spreads for small businesses. Smaller fractions eased other terms such as the size and cost of credit lines, loan covenants, and collateralization requirements. The banks attributed the easing of standards and terms primarily to heightened competition from other bank and nonbank lenders.

Many branches and agencies reported curtailing their business lending. About a quarter of the foreign respondents reported having tightened standards on business loans. Large fractions had tightened loan terms, with a few of the foreign respondents indicating that terms had been tightened considerably. About a third of the branches and agencies boosted the costs of credit lines, about a quarter widened spreads over base rates, and 20 percent cut the maximum sizes of credit lines. Smaller fractions tightened other loan terms. Those tightening standards and terms indicated that their primary reason for doing so was a weakening of their parent banks' current or expected capital position.

The fraction of respondents reporting strengthening demand for business loans has trended higher since mid-1996. In the latest survey, about 30 percent of the domestic banks noted increased demand for business loans from larger firms, and 20 percent from small businesses. About 20 percent of the branches and agencies reported a pickup in demand as well. Consistent with the last couple of surveys, the increased demand was attributed to higher borrowing for mergers and acquisitions, plant and equipment investment, and inventory financing, in that order.

A few of the domestic respondents reported having eased standards for commercial real estate loans; there was little change in standards at the branches and agencies. As in January, substantial fractions of both the domestic and foreign respondents reported increased demand for these loans.

The May Senior Loan Officer Survey included special questions that revealed loans to REITs had grown very rapidly at many of the respondent banks. Indeed, the volume of such loans, which can be either secured or unsecured, nearly doubled at the respondent banks over the past year. The most rapid growth was at large domestic banks and branches and agencies of foreign banks. The respondents indicated that this growth reflected primarily the need to finance increased direct holdings of properties by REITs and, to a somewhat lesser extent, a pickup in merger and acquisition activity involving REITs. Despite the rapid growth over the past year, the bulk of the respondents anticipated that their bank's loans to REITs would grow either slowly or moderately over the coming year.

Another set of special questions found that about a quarter of the domestic respondents and a somewhat smaller share of the branches and agencies were receiving more requests for loans to finance imports or exports (or for other forms of trade finance) from firms located in East Asian emerging economies affected by the economic problems in the region. However, with the exception of a few of the smaller domestic banks, the respondents that had provided such trade financing before the outbreak of the Asian economic problems last year indicated that they were now less willing to do so. Indeed, a few of the respondents reported that they were now unwilling to make such loans.

Lending to Households
(Table 1, questions 10-17 and 24-25)

Fewer banks reported changes in consumer loan standards and terms than on recent surveys, suggesting that more banks have completed desired adjustments to take account of the deterioration in consumer loan quality that became evident a couple of years ago. On net, two banks expressed greater willingness to make consumer installment loans, seven banks tightened standards on credit card loans, and three banks tightened standards on other consumer loans. Most banks reported no changes in credit card terms, although about 10 percent cut the size of credit lines on new or existing accounts. Terms on other consumer loans, which had been eased at a few banks on the last few surveys, were about unchanged in May. The demand for consumer loans of all types increased at about 10 percent of the respondents, on net.

Standards for approving mortgage applications were also about unchanged, with just three banks easing them over the past three months. Nearly two-thirds of the banks, on net, reported increased demand for these loans. Even though the survey question specifically refers to mortgages to purchase homes, the large number of respondents indicating increased demand may reflect, in part, the brisk pace of refinancing activity. Indeed, the banks attributed the recent rise in residential mortgage loans on banks' books to both increased home sales and higher refinancing activity. They noted that refinancing has boosted mortgage loans held by banks both because some households take "cash outs" to pay down other debts or make new purchases and because the refinancing of securitized mortgage loans moves the loans back onto banks' books, at least temporarily.

Securities Growth
(Table 1, question 23; table 2, question 13)

Responses to a special question about the reasons for the rapid growth in securities holdings late in 1997 and early this year indicated that banks were purchasing securities in order to leverage up their capital and boost returns on equity. Until recently, many bank holding companies repurchased shares to pay out excess capital. However, with stock prices high, this alternative may not be attractive now. In addition, the respondents pointed to the fact that U.S. bank holding companies that engage in pooling of interest mergers are not allowed to repurchase shares for a time. For banks in these holding companies, strong earnings may generate more capital than the firm needs for its operations, and securities purchases may be viewed as a way to put the excess capital to work. In addition to higher desired leverage, a number of the foreign branches and agencies reported that the trend in financial markets toward the securitization of new classes of assets was presenting banks with attractive securities to purchase.

Year 2000 Risks
(Table 1, questions 18-22; table 2, questions 8-12)

Additional special questions asked respondents about the management of risks resulting from possible year-2000 problems of their customers. Both the domestic and foreign respondents had generally included year-2000 preparedness in their underwriting and loan review standards. However, the responses suggest that U.S. banks are somewhat further along in the process of assessing such risks: Most U.S. banks had evaluated for year-2000 compliance more than 5 percent of their business customers that account for a material proportion of their loans, while only about half of the branches and agencies had done so. Nonetheless, even among the domestic respondents, only a fairly small number had evaluated a large fraction of their customers. Several of the respondents noted that they anticipated completing a large number of such evaluations in the near future. While few of the respondents reported rejecting loan applicants or downgrading existing loans because of year-2000 compliance problems, more than a third currently include year-2000-related covenants in loan agreements with customers that are not year-2000 compliant either some of the time or almost all of the time.

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)