Senior Loan Officer Opinion Survey on
Bank Lending Practices

The January 2000 Senior Loan Officer Opinion Survey on Bank Lending Practices focused primarily on changes in the supply of and demand for bank loans to businesses and households over the past three months. Supplementary questions addressed the reasons behind the recent rise in delinquency rates on commercial and industrial (C&I) loans, the unusually heavy lending to securities brokers and dealers during November and December, and 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 somewhat more cautious lenders over the past three months but do not suggest a widespread reduction in credit availability.

The survey results point to a continued firming of business lending practices. A significant percentage of domestic banks and branches and agencies of foreign banks reported having tightened C&I loan terms, in particular risk premiums. Compared to November, a higher net percentage of both domestic and foreign respondents reported that they had boosted underwriting standards on C&I loans as well. In addition, a notable fraction of domestic banks raised standards for commercial real estate loans. On the demand side, domestic banks noted that demand for C&I loans from large and middle-market firms and demand for commercial real estate loans had increased over the past three months.

Well over half of the respondents agreed that the pattern of delinquency rates on their own C&I loan portfolios is consistent with the edging upward of aggregate delinquency rates that began in early 1998. Both domestic banks and branches and agencies of foreign banks indicated that their problem loans are limited to specific industries. However, many banks also view the delinquency rates on C&I loans as returning to a more normal long-run level.

Among domestic banks, the willingness to make consumer installment loans was about unchanged. Nonetheless, a few banks tightened their standards on credit card and other consumer loans. For the third consecutive quarter, a large fraction of banks reported that demand for home mortgages weakened, and a fair number of banks also reported a modest decrease in demand for consumer loans.

In the last two months of 1999, a number of large domestic banks and branches and agencies of foreign banks stepped up their lending to securities brokers and dealers through reverse RP agreements. Both domestic and foreign participants in this market indicated that they increased their activity in response to greater funding needs by dealers and difficulties encountered by dealers in obtaining funding elsewhere.

Consistent with the relatively benign conditions surrounding the century date change, very few banks indicated that Y2K-related concerns had any significant effect on their lending activities. The survey results suggest that Y2K-related deposit inflows tended to exceed somewhat Y2K-related credit demands.

Lending to Businesses
(Table 1, questions 1-8; Table 2, questions 1-8)

Over the past three months, 11 percent of domestic banks tightened standards on C&I loans to large and middle-market firms, up from 9 percent, on net, in November. No domestic or foreign bank reported that they had eased standards. For the second consecutive survey, almost 29 percent of branches and agencies of foreign banks reported tighter standards on C&I loans. In the case of lending to small firms, nearly 10 percent of domestic banks indicated that they had tightened standards, up from only 2 percent, on net, in November.

Regarding terms on business loans, both domestic and foreign respondents reported a further tightening, though the tightening was slightly more pronounced at branches and agencies of foreign banks. For domestic respondents, 35 percent, on net, reported charging higher premiums on riskier loans to large and middle market firms, and 25 percent, on net, charged higher spreads of loan rates over their cost of funds. For small firms, 22 percent of domestic banks, on net, reported charging higher spreads on riskier loans, while other terms remained basically unchanged. On the foreign side, 43 percent of respondents reported charging higher risk premiums, and 29 percent reported raising costs for credit lines. Both domestic and foreign banks reported a reduced tolerance for risk as the most important reason for tightening standards and terms, followed by a less favorable or more uncertain economic outlook and a worsening of industry-specific problems.

On net, 9 percent of domestic banks reported stronger demand for business loans from large and middle-market firms, while the demand from small firms was reported to be about unchanged. In contrast, 19 percent of foreign banks indicated a moderate weakening in the demand for C&I loans. Among domestic banks that reported stronger demand, increased merger and acquisition financing was given as the primary reason, followed by the need to finance accounts receivable and capital expenditures. Banks that reported decreased demand for C&I loans cited reduced business fixed investment as the most common reason.

A special question addressed reasons for the slight upward trend in delinquency rates on C&I loans evident since early 1998. Among the banks surveyed, nearly 60 percent of domestic respondents and 90 percent of foreign respondents reported that their delinquency rates had in fact increased. Industry-specific problems, particularly in health care, were cited as the most important factor, especially among large domestic banks and foreign respondents. Although several foreign respondents pointed to a general easing of lending standards between 1994 and 1998 as a cause behind the recent rise in delinquency rates on C&I loans, many banks viewed delinquencies as returning to a more normal long-run level from the unusually low levels prior to 1998. Relatively few banks noted that a general seasoning of their C&I loan portfolio has had an effect on the recent increase in delinquency rates, despite the continued increase in average maturity of business loans evident in the Survey of Terms of Business Lending.

For commercial real estate loans, 11 percent, on net, of domestic banks reported somewhat tighter standards, while standards at foreign respondents were reported to be unchanged. On the demand side, 11 percent, on net, of domestic banks reported moderately stronger demand for commercial real estate loans, while 17 percent of foreign respondents reported weaker demand.

Lending to Households
(Table 1, questions 9-16)

The demand for home mortgage loans was reported to have deteriorated further over the past three months. Compared to November when 41 percent of senior loan officers reported weaker demand on net, 64 percent reported weaker demand in the current survey the highest net percentage since the first quarter of 1995. On net, banks have been reporting weaker demand for home mortgage loans for the last three quarters. However, the results are likely influenced by a sharp slowdown in refinancing activity, though the question specifically refers to demand for mortgage loans to purchase a home.

Compared to three months ago, 4 percent, on net, of banks reported somewhat greater willingness to make consumer installment loans. A small net fraction of banks indicated that they had tightened credit standards for both credit card and other consumer loans. Despite rapid growth in consumer credit in December, almost 10 percent of respondents, on net, reported decreased demand for consumer loans. It appears likely that much of the consumer lending late last year represented heavy credit card usage, which lending officers may not have factored into their responses.

Lending to Brokers and Dealers
(Table 1, question 17; Table 2, question 9)

Bank lending to securities brokers and dealers in the form of reverse RP transactions, was very strong during November and early December. Eight foreign respondents and twelve domestic banks indicated that they had increased their activity in the RP market over this period. Several respondents noted that demand for credit rose, owing to securities brokers and dealers heavy funding needs. In addition, banks stepped up their lending in this market because broker-dealers cost of commercial paper extending over year-end rose markedly and because other institutional lenders pulled back.

Year 2000
(Table 1, questions 18-28; Table 2, questions 10-14)

Only three domestic banks reported that they extended more than a negligible amount of credit to nonfinancial firms for Y2K-related needs. These loans were used mostly to fund precautionary build-ups of liquidity and inventories. Banks also mentioned inventories and liquidity to explain strong C&I loan demand, and it was possible that some of the strength in C&I lending was for Y2K-related reasons that were not evident to respondents. Similarly, only four domestic banks extended at least a moderate amount of Y2K-related credit to financial firms, particularly mutual funds, other domestic banks, and insurance companies.

Most banks reported no unusual funding pressures around year-end. Sixty percent reported that neither credit demands nor deposit flows were materially affected by Y2K-related concerns. However, about a quarter of domestic banks indicated that higher credit demands were about matched by Y2K-related net deposit inflows, and 9 percent of domestic respondents and 14 percent of foreign branches and agencies indicated that they had excess funds to invest, owing to stronger Y2K-related deposit inflows than loan demands.

In addition to this report, charts and tables are available in Acrobat (PDF) format. Obtaining the Acrobat Reader

Charts (15.4 KB PDF)
Measures of lending practices from current and previous surveys
Chart data (ASCII)

Table 1 (34.0 KB PDF)
Summary of responses from U.S. banks

Table 2 (20.0 KB PDF)
Summary of responses from branches and agencies of foreign banks

Full report (65 KB PDF)