Senior Loan Officer Opinion Survey on
Bank Lending Practices

The Federal Reserve conducted a special Senior Loan Officer Opinion Survey in mid- September to assess the impact of recent financial turbulence on the bank loan market.¹ In order to limit reporting burden, the survey focused only on changes in the supply of and demand for commercial and industrial loans and consumer installment loans between mid-August and mid-September.

The survey results indicate that there has been a fairly widespread tightening of standards and terms for commercial and industrial loans to larger firms. For domestic banks, this tightening marks a shift from past surveys, while for the foreign respondents it is a continuation of recent trends. In contrast, the survey revealed little change in standards and terms for commercial and industrial loans to small firms or in banks' willingness to provide consumer installment loans. Demand for both business and consumer loans reportedly has softened recently.

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

The domestic responses to the questions on business lending standards and terms differed markedly by size of borrower. Nearly a quarter of the domestic respondents, on net, reported that standards for loans to large and middle-market firms had been tightened over the past month. Somewhat smaller, but still substantial, fractions of the respondents reported having tightened some loan terms--including the sizes of credit lines, fees, and loan spreads. A few banks, on net, reported having tightened collateralization requirements and loan covenants on loans to larger customers. By contrast, there was little net change reported in standards for commercial and industrial loans to small businesses. Most terms on these loans were also little changed, on net, although a number of banks trimmed the maximum sizes of credit lines they were willing to offer. However, even the relative stability of the terms on small loans marks a modest departure from recent surveys, which have generally shown some easing.

The domestic responses also differed substantially by bank size, with larger banks considerably more likely than smaller banks to report having tightened standards and terms. Almost thirty percent of the large banks on the panel (those with assets greater than $15 billion) reported having tightened lending standards on loans to large and middle-market firms, while only about ten percent of the smaller banks, on net, had done so. Similarly, a greater share of the large banks generally reported having tightened terms on such loans; the only exception being that a somewhat larger fraction of the smaller respondents tightened maximum credit line sizes.

The banks that reported having tightened lending standards and terms most commonly attributed their decision to a less favorable economic outlook and a worsening of industry-specific problems, as well as a reduced tolerance for risk. The banks indicated that the reduced tolerance for risk did not stem from concerns about their own foreign losses or exposures.

Several of the domestic respondents, on net, noted weaker demand for commercial and industrial loans. They attributed this decline primarily to decreased demand for merger and acquisition financing and, to a lesser extent, to reductions in their customers' investments in plant and equipment. In their comments, a few banks noted that loan demand had been boosted by a shift from the securities markets, especially the junk bond market, toward bank finance. However, it appears that this substitution was generally more than offset by other factors that weakened demand. A couple of respondents noted that a shift from the capital markets might be in the works, but that it had not yet occurred.

Responses from the U.S. branches and agencies of foreign banks showed a continuation of the trend, visible in the last few surveys, toward tighter standards and terms on commercial and industrial loans. About 40 percent of the foreign respondents reported having tightened lending standards over the month before the survey. More than half tightened some loan terms, including credit line sizes, fees, and spreads. Considerably smaller fractions tightened other loan terms. Like their domestic counterparts, the foreign respondents attributed the tightening to a less favorable economic outlook, a worsening of industry-specific problems, and reduced tolerance for risk (although they were more likely than the domestic banks to attribute their reduced tolerance for risk to heightened concerns about their losses or exposures outside the United States). As on other recent surveys, a number of the branches and agencies also pointed to a deterioration in their parent bank's capital position as an important reason for tightening. The foreign respondents reported a modest decline, on net, in the demand for business loans, attributing the weakness primarily to a decline in merger and acquisition financing needs.

Because larger banks and foreign branches and agencies are more likely to be involved in the market for large syndicated credits, the pattern of tightening reported on the survey is consistent with anecdotal reports suggesting that conditions in that market have deteriorated in recent weeks. Indeed, a couple of respondents suggested in their comments that they were tightening terms in response to the reduced receptivity of the syndicated loan market.

Lending to Households
(Table 1, questions 8 and 9)

Only three of the domestic banks indicated that their willingness to make consumer installment loans had risen over the past month. The other respondents reported no change. In August, a somewhat larger fraction of the respondents reported increased willingness to make such loans. Demand for consumer loans reportedly eased a bit, on net, since mid-August. By comparison, demand was unchanged, on balance, in the August survey.

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 (10 KB PDF)
Summary of responses from branches and agencies of foreign banks

Full report (41 KB PDF)