Senior Loan Officer Opinion Survey on
Bank Lending Practices

The November 1998 Senior Loan Officer Opinion Survey on Bank Lending Practices focused primarily on changes over the past three months in the supply and demand for bank loans to businesses and households. Additional questions concerned interbank lending and potential risks arising from business customers' year-2000 difficulties.

The survey results suggest a broad tightening of business lending practices. Citing increased concern over the economic outlook, a large share of the participants indicated that they had firmed standards and terms on loans to large and middle-market businesses and on commercial real estate loans. Unlike recent surveys, some banks also reported having tightened standards and terms on loans to small businesses. Respondents stated that demand for business and commercial real estate loans had increased, boosted somewhat by customers having difficulty raising funds in the securities markets.

The survey found little evidence of any changes in lending practices on loans to households. A few banks said they had become more willing to make consumer installment loans, while moderate percentages said they had tightened standards on credit cards and on other consumer loans. Terms on these loans reportedly were unchanged.

The responses to the questions on interbank lending show that many banks had reduced the amount they were willing to lend to certain financial institutions and some banks had required shorter maturities, more collateral, or higher premiums on interbank loans. Nearly all those restricting their interbank lending had applied the adjustments to selected individual banks, many banks had restricted terms to Japanese institutions generally, and a few had done so for European institutions generally.

The respondents reported having made good headway in assessing risks arising from year-2000 problems of their customers. Most of the banks noted that the large majority of their important business customers were satisfactorily approaching year-2000 preparedness.

Lending to Businesses
(Table 1, questions 1-14; table 2, questions 1-13)

More than one-third, on net, of the domestic banks said that over the past three months they had tightened standards on C&I loans to large and middle-market borrowers (up from one-quarter in September), and two-thirds of the foreign respondents said they had tightened (up from two-fifths). This share of the domestic respondents reporting tightened standards on these loans is the largest since 1990. Similar fractions reported that they had tightened terms on C&I loans to large and middle-market customers, with many having raised the spreads of loan rates over the banks' cost of funds and the premiums charged on riskier loans. Of those that had tightened standards or terms on loans to large and middle-market firms, about two-fifths said the tightening had applied predominantly to large firms, about 10 percent said predominantly to middle-market firms, and the remainder said policies toward both groups of firms had been tightened about equally. The largest domestic respondents--those with more than $15 billion in assets--more commonly reported having tightened standards and terms for these loans than did the smaller respondents, perhaps in part because larger banks are more likely to compete as a source of funds with the capital markets--where borrowing conditions have deteriorated in recent months. About 15 percent, on net, of the domestic respondents had tightened standards and terms on loans to small businesses; the respondents had reported no change in standards or terms, on net, on these loans in September.

A less favorable or more uncertain economic outlook was the most commonly cited reason for having tightened standards and terms on C&I loans. Many banks also pointed (in decreasing order of frequency) to a worsening of industry-specific problems, a reduced tolerance for risk, and less aggressive competition from other banks and nonbank lenders. Both the September and November surveys asked about changes in lending practices since August, so banks that reported tightening on both surveys did not necessarily tighten between September and November. However, a special question on the November survey found that large shares of the domestic and foreign respondents had tightened their standards and terms for C&I loans since September.

In contrast to September, when many of the banks had said demand for C&I loans had fallen, responses to the November survey show an increase in demand for these loans. About one quarter, on net, of the domestic respondents had experienced greater demand from large and middle-market firms, and 10 percent, on net, had experienced increased demand from smaller firms. About 15 percent, on net, of the foreign banks reported stronger demand. The respondents pointed to shifts from other sources of credit--a response that had not commonly been cited in the past--as the primary cause of the increased demand. Specifically, about three-quarters of the sum of the largest domestic and the foreign respondents said substitution from the bond market, and half said substitution from the commercial paper market, had boosted loan demand. Few of the smaller domestic respondents reported having experienced such substitution.

Nearly half of the domestic and foreign respondents had tightened standards on commercial real estate loans over the past three months. About half of the respondents had widened loan rate spreads, and smaller fractions had tightened other terms, including loan-to-cost ratios, debt-service coverage ratios, requirements for take-out financing, and maximum loan sizes. Most commonly the respondents said they had tightened because of a worsening of the economic outlook, but many also pointed to disruption in the commercial mortgage-backed securities market and to increased concern about the reliability of take-out financing. More respondents had experienced decreased demand for these loans than had experienced increased demand. Nevertheless, many respondents said the decline in issuance of commercial mortgage-backed securities had led to increased demand at their bank by borrowers encountering difficulty getting credit elsewhere.

Lending to Households
(Table 1, questions 15-23 )

About 5 percent of the banks said their willingness to make consumer installment loans had increased over the past three months, about the same as in September; no banks said their willingness to make these loans had decreased. Fifteen percent had tightened standards on credit card loans and 10 percent had tightened standards on other consumer loans. Few banks reported any change in terms on consumer loans of either type. About 10 percent of respondents, on net, had experienced weaker demand for consumer loans. Almost all of the banks said that disruption in the market for asset-backed securities had not affected their balance sheets or lending practices with respect to household lending.

Few banks indicated a change in standards for home mortgages. More than half reported that demand for these loans had strengthened, with many stating that demand for mortgages had strengthened substantially. Although the question specifically asked about demand for mortgages to purchase homes, the responses may reflect, in part, the recent high level of mortgage refinancing activity.

Interbank Lending
(Table 1, questions 27 and 28; table 2, questions 17 and 18)

Many reports in recent months have indicated that increasing concern about the financial health of counterparties had led to changes in banks' interbank lending policies, the subject of special questions on the November survey. Nearly two-thirds of the domestic and half of the foreign respondents had taken steps to restrict their interbank lending during the past three months. About half had reduced the amount they were willing to lend to some or all institutions, and about a third had stopped lending entirely to certain institutions. Significant percentages also had cut back maturities on term loans, stopped making term loans altogether, required greater interest-rate premiums, or increased the amount or restricted the types of collateral required when entering into repurchase agreements. Of those banks that changed their interbank lending policies, most had applied the restrictions to selected institutions they considered less creditworthy. Many also had adopted a more restrictive posture toward Japanese institutions generally and a few toward European institutions generally. Only two had restricted their lending to domestic money center banks generally.

Year 2000 Risks
(Table 1, questions 24-26; table 2, questions 14-16)

Additional special questions asked respondents about the management of risks resulting from the possible year-2000 problems of their customers. The results show significant progress in the respondents' evaluation of these problems since the May 1998 survey, which had included similar questions. Half of both the domestic and the foreign respondents reported that they had evaluated the year-2000 preparedness of more than 90 percent of the business customers that account for a material proportion of their loans. None of the respondents had evaluated less than 25 percent. In May, less than half of domestic respondents and less than one-fourth of the foreign respondents had evaluated even 25 percent of their customers. Virtually all of the respondents found that less than 15 percent of their material business customers were not making satisfactory progress toward achieving year-2000 preparedness. Likely for this reason, nearly all the survey participants had downgraded less than 3 percent of their material business customers for inadequate preparedness.

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 (30 KB PDF)
Summary of responses from U.S. banks

Table 2 (19 KB PDF)
Summary of responses from branches and agencies of foreign banks

Full report (73 KB PDF)