Senior Loan Officer Opinion Survey on
Bank Lending Practices

The November 1999 Senior Loan Officer Opinion Survey on Bank Lending Practices focused primarily on changes over the past three months in the supply of and demand for bank loans to businesses and households. Additional questions addressed Year 2000 (Y2K) issues. Loan officers from fifty-five large domestic banks and twenty-one U.S. branches and agencies of foreign banks participated in the survey. The responses indicate that banks became more cautious lenders over the past quarter but do not suggest a widespread reduction in credit availability. Household demand for credit has reportedly declined, particularly in the mortgage market.

The survey results point to a continued firming of business lending practices. At domestic banks, the tightening took place predominantly in terms on C&I loans, particularly in the form of higher risk premiums; a higher net percentage of respondents than in August reported that they had strengthened underwriting standards as well. The tightening of both standards and terms on C&I loans was more pronounced at branches and agencies of foreign banks. A small net fraction of domestic banks and a larger fraction of branches and agencies of foreign banks raised standards for commercial real estate loans.

A few domestic banks reported increased willingness to make consumer installment loans. Very few banks changed their standards or terms on credit card or other consumer loans, although several banks reported charging higher spreads over their cost of funds on outstanding credit card balances. For the second consecutive quarter, a significant fraction of banks reported that demand for home mortgages weakened, and in November, several banks also reported a modest decrease in demand for consumer loans.

On Y2K questions, the respondents indicated that demand for contingency lines of credit remained low. Domestic banks were generally willing to extend such lines, but often only to existing customers; moreover, the standards and terms for such loans were usually tighter than those on otherwise similar credit lines. However, banks were not, in general, tightening terms and standards on renewals of existing lines extending over year-end. Banks that were limiting new credit lines over year-end were chiefly concerned about adequately evaluating new customers for Y2K preparedness and about the possibility of a significant increase in the cost of funding loans over year-end.

Lending to Businesses
(Table 1, questions 1-10; Table 2, questions 1-10)

About 9 percent, on net, of domestic bank respondents said that over the past three months they had tightened standards on C&I loans to large and middle-market firms, up from 5 percent in August. Among branches and agencies of foreign banks, almost 30 percent said that they had tightened, up from 23 percent in August. For the second consecutive quarter, the survey found virtually no change, on net, in standards on loans to small businesses.

On C&I loans to large and middle-market firms, an average of 30 percent, on net, of domestic banks reported increasing risk premiums, costs of credit lines, and spreads of loan rates over the banks' cost of funds. The net percentage of respondents tightening these terms to large and middle-market firms has been rising since May. In addition, a significant number of banks reported charging higher premiums on riskier loans to small businesses. A substantial fraction of branches and agencies of foreign banks reported increasing premiums charged on riskier loans and many also indicated tightening non-price related terms. As in the August survey, the most commonly cited reasons for tightening remained a less favorable or more uncertain economic outlook, an expected worsening of industry-specific problems, and a reduced tolerance for risk.

Demand for C&I loans at domestic banks was reported to be essentially unchanged, on net, for the second consecutive quarter. Similarly, foreign respondents also indicated virtually no net change in demand. Merger and acquisition financing needs were given as the primary reason for increased demand by both the domestic banks and foreign branches and agencies that reported higher demand. Moreover, in a special question, 16 percent of large domestic banks and 10 percent of foreign banks stated that demand for C&I loans had been moderately boosted by the high cost of commercial paper issuance over year-end. Among domestic banks that experienced decreased demand, reduced business fixed investment was cited as the most common reason.

On net, 9 percent of domestic respondents reported tighter standards on commercial real estate loans. By contrast, one-third of foreign respondents tightened standards on commercial real estate loans, a slightly lower percentage than in August. On net, domestic bank respondents reported little change in the demand for commercial real estate loans over the past three months; on the other hand, almost 20 percent of branch and agency respondents noted a moderate weakening in demand.

Two special questions addressed changes in terms on commercial real estate loans over the past nine months. On net, domestic respondents reported that the terms on commercial real estate loans have been essentially unchanged since February. A considerable fraction of branches and agencies of foreign banks tightened terms on commercial real estate loans; in particular, spreads of loan rates over banks' cost of funds had widened, while maximum loan sizes and loan-to-value ratios had declined.

Lending to Households
(Table 1, questions 11-18)

On net, 41 percent of senior loan officers reported weaker demand for home mortgage loans in November, the highest net percentage since mid-1995 and the second consecutive quarter of weakness in this sector. Even though the question specifically asks about demand for mortgages for purchasing homes as opposed to refinancing existing mortgages, respondents reporting a decrease in demand may have been influenced by the decline in refinancing activity that began earlier in the year. However, the survey results are broadly consistent with the slowing in residential housing activity evident since the summer.

The willingness of banks to make consumer installment loans has increased slightly compared to three months ago. Standards and terms for consumer loans other than credit cards remained basically unchanged. However, two banks, on net, reported tightening standards on credit card applications. Furthermore, 13 percent of banks, on net, reported charging higher spreads over their cost of funds on credit card loans, a small increase from the August survey. On the demand side, there was a turnaround: on net, 8 percent of respondents reported decreased demand for consumer loans, whereas in August, 11 percent had reported an increase in demand.

Year 2000
(Table 1, questions 19-27; table 2, questions 11-19)

The survey results continue to indicate that requests for Y2K contingency lines of credit have been limited. A relatively small percentage of domestic bank respondents had received requests for such lines from nonfinancial firms, while 16 percent of banks had received requests from financial firms. Despite some loan officers in the last survey noting that more requests might be forthcoming, these percentages are actually slightly lower than those observed in August. Branches and agencies of foreign banks were even less likely to have received requests for such lines.

Requests for contingency lines came from many different types of financial firms, with the largest number of respondents having received requests from other domestic commercial banks, followed by mutual funds, securities dealers and brokers, and insurance companies. Several respondents commented that they expect higher utilization of existing credit lines, which already have been extended over year-end, to fund year-end inventory accumulation and slower collection of receivables, but that companies generally did not need Y2K contingency financing.

On the supply side, only two domestic and four branch and agency respondents were unwilling to extend Y2K contingency lines of credit. However, a majority of domestic and foreign respondents are limiting Y2K contingency lines of credit to existing customers, and in many cases such lines are being made available only to their most creditworthy existing customers. Compared to otherwise similar credit arrangements (such as with respect to maturity and size), a substantial fraction of large domestic and foreign respondents reported somewhat more stringent standards and terms on Y2K contingency lines. Nonetheless, compared to three months ago, 9 percent of domestic banks were more willing to extend Y2K contingency financing.

In contrast to the tighter standards and terms for Y2K contingency lines, 78 percent of the domestic banks surveyed reported no effect on either standards or terms for the renewal of expiring credit lines that extend over year-end but that are not specifically meant to meet year-end funding needs. Similarly, 60 percent of branch and agency respondents, up from 32 percent in August, reported no effect on either standards or terms. Among domestic banks that are tightening standards or terms on financing that extends over year-end, a higher percentage than in August stated that advances over year-end will be priced relative to their own cost of funds rather than independent indexes (such as LIBOR) and will likely entail a rate premium. The most common adjustment made by foreign respondents to credit lines that extend over year-end was to apply tighter credit standards.

Of the respondents that were unwilling to extend Y2K contingency lines of credit, or that were limiting such lines to existing customers, or that had tightened standards or terms on renewals of existing lines, a variety of reasons for their reluctance were given. Almost half of domestic banks cited concerns about adequately evaluating new customers for Y2K preparedness. In addition, a high percentage of both domestic banks and branches and agencies of foreign banks expressed concern about the anticipated increased cost of, and uncertainty surrounding, funding credit extensions over year-end. At both domestic and foreign banks, concerns about the effect of Y2K-related lending on capital ratios abated significantly relative to the August survey.

The report, with charts and tables, is available in Acrobat (PDF) format. Obtaining the Acrobat Reader

Charts (16 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 (20 KB PDF)
Summary of responses from branches and agencies of foreign banks

Full report (76 KB PDF)