Senior Loan Officer Opinion Survey on
Bank Lending Practices

The August 1998 Senior Loan Officer Opinion Survey on Bank Lending Practices posed the usual questions bearing on changes in the supply of and demand for bank loans to businesses and households over the past three months. Additional questions targeted changes in standards and terms on home equity, consumer, and commercial real estate loans, and the causes and effects of reduced participation of U.S. branches and agencies of foreign banks in the U.S. loan market.

Although the survey provided some additional evidence of narrowing of interest rate spreads for most types of loans, changes in other terms and in lending standards were generally small. The respondents attributed the narrowing of spreads primarily to increased competition from other banks; lesser numbers of respondents indicated that nonbank lenders were a source of greater competition.

In contrast to domestic banks, substantial fractions of the U.S. branches and agencies of foreign banks reported tighter credit standards and terms. In special questions addressed to them, those foreign institutions reporting decreased participation in U.S. loan markets indicated that concerns about their parents' financial condition or increased funding costs due to their parents' financial condition were major reasons for the reduced lending activity. Most domestic banks perceived the effects of foreign banks' decreased lending activity on rates and terms prevailing in U.S. loan markets to be minor, although a substantial minority, and most foreign branches and agencies, believed the effect to be more important.

Lending to Businesses
(Table 1, questions 1-9 and 25-28; table 2, questions 1-15)

Domestic respondents reported no changes, on net, in standards for commercial and industrial loans to middle market and large corporate customers, and only 5 percent of respondents, on net, eased standards for commercial and industrial loans to smaller firms over the past three months. About 15 percent of domestic respondents, on net, reported narrowing spreads on loans to medium and large firms, down from about 35 percent in May, but about 30 percent reported trimming spreads on loans to small firms. As has been the case in recent surveys, those reporting an easing of credit standards or terms noted more aggressive competition from banks and, to a lesser extent, nonbank lenders as the primary reasons for the change.

About 17 percent of the U.S. branches and agencies of foreign banks, on net, reported tighter credit standards for commercial and industrial loans; this is down substantially from the past two surveys. However, the fractions of the branches and agencies reporting they had tightened business lending terms, including fees and spreads, remained at the higher levels of recent surveys. Foreign respondents attributed their further tightening of standards and terms primarily to a deterioration in their parent banks' capital positions.

August's survey also included special questions for the U.S. branches and agencies of foreign banks regarding their commercial and industrial lending over the past year. More than half, 61 percent, of the foreign respondents indicated that growth in this type of lending had slowed at their institution over the past year. The most common reason given for the slowdown was tighter lending standards and terms imposed in order to limit loan growth, in recognition of the financial condition of parent banks. Respondents also noted that deterioration in the financial condition of their parent banks had driven up funding costs, making lending less profitable. Some other respondents volunteered as an "other" reason for slower loan growth the unattractive levels to which spreads between loan rates and market rates had fallen. Increased concern about the credit quality of their customers was given as a relatively minor reason for slower loan growth, and weaker demand was cited by only a single respondent.

When queried about the effects that the pullback in lending by some U.S. branches and agencies of foreign banks has had on loan terms for large U.S. firms, respondents provided contrasting answers depending on their perspective. About three quarters of the foreign respondents indicated that the effect was either "moderate" or "substantial," compared to 40 percent of large domestic banks. Only 10 percent of the smaller domestic banks perceived a large effect.

A modest portion of the domestic respondents, 9 percent on net, indicated demand for business loans from larger customers had weakened over the last three months. This is the first reported decrease since the first quarter of 1996 and partly reverses the increase in loan demand reported in recent surveys. Those respondents reporting weaker loan demand pointed to decreased merger and acquisition activity, decreased customer investment in plant and equipment, and increased funding from nonbank loan sources as significant reasons for the decreased demand. Increased use of internally generated funds and decreased inventory financing needs ranked somewhat lower. Loan demand from smaller firms at domestic banks and loan demand at branches and agencies of foreign banks were both reported to be unchanged, on net.

Domestic respondents also indicated little change, on net, in credit standards for commercial real estate loans over the last three months, but more than half reported, in special questions, having narrowed interest rate spreads on these loans over the past year. Again, the most common reason cited for the narrower spreads was heightened bank competition, with more aggressive nonbank competition a distant second. A small share of foreign respondents, on net, had tightened credit standards on commercial real estate loans. A large majority, 82 percent of domestic and 67 percent of foreign respondents, on net, reported that competing institutions had eased standards or terms on such loans over the past year.

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

A few respondents reported tighter consumer loan standards, but changes in terms were mixed. On net, 20 percent tightened standards on credit card loans, and 8 percent tightened standards on other consumer loans. Both responses represent a slight increase over the previous survey. Despite the tightening of standards, 10 percent of respondents, on net, expressed greater willingness to make consumer loans. Most banks reported no changes in credit card terms, although about 10 percent cut the size of credit lines and increased interest rate spreads on new or existing accounts. Terms on other consumer loans, which were unchanged on the previous survey, were eased, on net, in August: About a fifth of respondents reported narrower spreads on these loans. The demand for consumer loans was reported to be essentially unchanged over the past three months.

Domestic respondents reported no change in standards for home mortgage loans since May, but 35 percent, on net, reported increased demand for these loans, likely reflecting the robust housing market and the heavy pace of refinancing activity. In special questions on home equity loans, about 10 percent of respondents, on net, reported having eased lending standards and terms over the past six months. More than half of the respondents reported little change in demand for home equity loans over that period. Those respondents reporting increased demand gave consolidation of other loans as the primary reason, while those reporting decreased demand gave refinancing of mortgages as the primary reason.

Special questions were asked about the impact of changes in consumer lending standards and terms over the past two years. The responses suggest that tightening of standards has curtailed the volume of both credit card and other consumer lending at a number of banks. With respect to credit cards, almost 40 percent of the 38 banks that responded indicated that tighter standards had "virtually no" or a "minimal" impact on the volume of their lending, while about a third reported a "moderate" or "substantial" effect. More than a quarter of the banks reported that there had been no change in standards for such loans. As for other consumer lending, almost half of the 45 banks reporting indicated that there had been no net tightening of credit standards over the past two years. Of the banks that did tighten, about 60 percent reported "virtually no" or "minimal" impact on lending volume and 40 percent reported a "moderate" or "substantial" effect. With respect to credit cards, banks were also asked what fraction of their customer base was affected by any tightening of terms over the past two years. Virtually all of the 36 banks responding to this question had tightened terms on new or existing credit card accounts over this period. About a third of these banks indicated that this tightening had affected more than half of their accounts. However, about 60 percent reported that no more than a quarter of their accounts were affected and 40 percent of respondents put the share of affected accounts at 10 percent or less.

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 (29 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 (67 KB PDF)