Senior Loan Officer Opinion Survey on
Bank Lending Practices

The January 1999 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.¹ Additional questions concerned the rapid growth in securities at banks in the fourth quarter of 1998 and developments in the market for syndicated commercial and industrial loans.

The survey results suggest that, in contrast to the September and November surveys, domestic banks were no longer tightening business lending standards; however, citing continued concern over the economic outlook, significant, though reduced, fractions of participants indicated that they had firmed terms on loans to large and middle-market businesses and standards and terms on commercial real estate loans. The share of branches and agencies of foreign banks that reported tightening lending standards and terms on business loans was large and down only a little from November; for commercial real estate loans, the share of branches and agencies reporting tighter standards and terms rose from the November Survey. Some respondents, mainly domestic, indicated that demand for commercial and industrial loans had increased.

The survey found little evidence of substantial changes in lending practices with respect to households. Several banks said that they were more willing to make consumer installment loans, while modest percentages said that they had tightened standards on credit cards. Standards and terms on other consumer loans were reportedly little changed.

In responses to the additional questions, banks that had increased their holdings of securities in the fourth quarter of 1998 said that they had done so mainly because of more attractive yields, a desire to increase the duration of their securities portfolios, and a willingness to boost leverage. Many respondents reported some deterioration in the condition of the market for syndicated loans--for example, its capacity to absorb new credits without significant modification of terms--relative to six months ago, although some judged the market to have improved. Many participants who originate these loans reported that they had increased the use of "flexible pricing" during the syndication period.²

Lending to Businesses
(Table 1, questions 1-12; table 2, questions 1-11)

On net, only 7 percent of domestic respondents reported tightening lending standards for commercial and industrial loans to large and middle-market firms, and a mere 4 percent, on net, reported tightening lending standards for small firms. (In the November survey 37 percent and 15 percent reported tightening standards for larger and small firms respectively.) By contrast, 56 percent, on net, of the branches and agencies of foreign banks reported tightening standards for these loans in the past three months, down only a bit from November.

Domestic respondents continued to report a tightening of business loan terms, but these reports were not so widespread as in November. For example, 31 percent, on net, reported widening loan spreads, down from 47 percent, on net, in November. The most important reasons given for tightening were a less favorable, or more uncertain, economic outlook, a worsening of industry-specific problems, and decreased liquidity in the secondary loan market.³ Reports of tightening were much more widespread at the branches and agencies of foreign banks than at domestic banks.

In view of the general tightening of lending terms in recent months, banks were asked a special question about the share of their outstanding revolving loan commitments and other formal lending arrangements on which they would tighten terms--including fees and spreads over base rates--if the commitments were maturing and being repriced at the time of the survey. Most domestic respondents (77 percent) reported that they would tighten terms on relatively few commitments (less than 20 percent). By contrast, over half of the branches and agencies of foreign banks--who have been tightening credit standards and terms much more than domestic banks for several months--would tighten on 60 percent or more of their outstanding commitments.

Twenty percent of domestic respondents, on net, reported increased demand for commercial and industrial loans from large and middle-market firms over the previous three months, while 11 percent reported increased demand from small firms. The most important reason given for the increase in demand, by a substantial margin, was shifting customer borrowing from other sources that had become less attractive. About 9 percent of foreign respondents, on net, reported stronger loan demand.

About 15 percent of domestic respondents, on net, reported tightened standards on commercial real estate loans, down from about 46 percent in November; similarly, fewer banks tightened terms on these loans than in the previous survey. By contrast, 57 percent of the foreign respondents tightened standards on these loans, up from 44 percent in November. The percentage of foreign banks tightening terms on commercial real estate loans also increased from the November survey. The primary reasons given by domestic banks for tightening were disruptions in the commercial mortgage-backed securities market, a less favorable, or more uncertain, economic outlook, and increased concern about the reliability of take-out financing. Foreign respondents cited these reasons and a worsening of the condition or outlook for the commercial real estate markets, a reduced tolerance for risk, and a deterioration in their parent bank's current or expected capital position. About 30 percent of the domestic and 23 percent of the foreign respondents reported an increase in demand for commercial real estate loans. The most important reason given by domestic banks for the increased demand was a shift in customer borrowing from lenders having difficulty securitizing commercial mortgages. The branches and agencies of foreign banks reported customer financing needs as the most important reason for the reported increase in demand.

Loan Syndication
(Table 1, questions 25-26; table 2, questions 14-15)

In response to special questions, half of the domestic and two-thirds of the branches and agencies reported that the condition of the syndicated loan market--as measured, for example, by its capacity to absorb new credits without significant modification of terms--is worse now than it was six months ago, suggesting that conditions in this market may not have completely recovered from the turmoil of fall 1998. However, a significant percentage of respondents found this market not to have changed or even to have improved over this period. Among those domestic and foreign respondents that originate syndicated loans and perceive the market to have deteriorated, there has been an increased use of "flexible pricing" during the syndication period to raise the likelihood of full subscription. There was much less evidence that domestic respondents have trimmed originations in response to changes in the market for syndicated loans, or that loans on banks' books have grown faster than they otherwise would have because banks held a larger share of its originations. A few branches and agencies, however, did report having reduced originations of their loans because of problems in the syndications market.

Lending to Households
(Table 1, questions 13-22)

About 14 percent of banks reported increased willingness to extend consumer installment loans, up slightly from the previous survey. No banks reported a decreased willingness to extend these credits. Seven percent, on net, reported having tightened standards on credit-card loans, while standards for other consumer loans were eased by one bank, on net. A few banks reported raising spreads a bit on credit cards and other consumer loans. Three quarters of respondents indicated unchanged consumer loan demand; of the remaining respondents slightly more reported strength than weakness. Credit standards for mortgage loans were little changed, and 10 percent of respondents, on net, reported increased demand for home mortgages, down substantially from more than 50 percent in the November survey and the smallest increase reported since mid-1997.⁴

Two special questions asked about the minimum required payment on outstanding balances for credit cards now and in the late 1980s. The responses indicate that the minimum payment has declined a bit over the decade, and it is now in the range of 2 to 3 percent of the balance outstanding.

Growth in Bank Securities
(Table 1, questions 23-24; table 2, questions 12-13)

Thirty-six percent of domestic respondents reported increasing their securities holdings in the fourth quarter of 1998, while 21 percent reduced their holdings. For those large banks that reported increased securities holdings, the most important reason given was that yields on some securities had increased relative to costs of funds, thus making the securities more attractive investments. Banks also increased holdings of long-term securities to compensate for the shorter expected duration of mortgage-backed securities resulting from the decline in longer-term interest rates in recent months and the consequent increase in prepayment risk. Small banks primarily reported the increase in prepayment risk as the reason for the increase in securities holdings. Foreign respondents, on net, reported a decline in securities holdings in the fourth quarter.

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 (74 KB PDF)