Senior Loan Officer Opinion Survey on
Bank Lending Practices

The May 2000 Senior Loan Officer Opinion Survey on Bank Lending Practices(BLPS) 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 effect of conditions in the high-yield bond market on demand for C&I loans, changes in terms on residential real estate lending over the past two years, the distribution of loan-to-value ratios on home mortgage originations during the last three months, and loans to purchase and carry securities. Loan officers from fifty-seven large domestic banks and twenty-one U.S. branches and agencies of foreign banks participated in the survey. The responses indicate that banks became significantly more cautious lenders over the past three months.

The survey results point to an intensification of the recent tendency toward firmer business lending practices. The percentage of domestic banks tightening standards on C&I loans was the largest since the November 1998 survey, and the share of U.S. branches and agencies of foreign banks that tightened standards also rose. Both domestic and foreign banks tightened terms on C&I loans as well, particularly risk premiums, most commonly citing a less certain or more unfavorable economic outlook as the reason. In addition, a notable fraction of banks raised standards for commercial real estate loans.

A modest net fraction of domestic banks noted that demand for C&I loans from large and middle-market firms had decreased somewhat over the past three months, while a few banks, on net, noted somewhat stronger demand from small firms. Meanwhile, 45 percent of the foreign branches and agencies, on net, reported weaker demand. Nonetheless, many domestic and foreign banks reported that demand for C&I loans had been boosted by unfavorable conditions in the high-yield bond market, and most were fairly receptive to these customers.

In general, standards for residential mortgage loans were unchanged relative to three months ago. However, relative to two years ago, a significant fraction of banks reported having eased terms on residential mortgages, including increases in the maximum size of loans and lower spreads of loan rates over their cost of funds. As in the past three surveys, a large fraction of banks reported that demand for home mortgages had weakened. A notable fraction of banks also reported a modest decrease in demand for consumer loans. Most respondents reported no change in their willingness to make consumer installment loans.

Banks reported that the pickup in loans to purchase and carry securities since last fall was the result of strong demand from nonbank brokers and dealers as well as from private banking and retail clients. Most security loans are made to brokers and dealers. Most banks indicated that a very large percentage of their security loans are collateralized. At domestic banks, the most common form of collateral is equity instruments, whereas at foreign branches and agencies, U.S. government and agency securities were almost as commonly used for collateral as equities.

Lending to Businesses
(Table 1, questions 1-9; Table 2, questions 1-9)

Almost a quarter of domestic respondents reported tightening standards on C&I loans to large and middle-market firms over the past three months, more than double the 11 percent last quarter. For large and middle-market firms, the percentage of banks tightening was the largest since the November 1998 survey, and for small firms the percentage tightening rose above that level, to 21 percent. The share of U.S. branches and agencies of foreign banks reporting tighter lending standards also rose, to 33 percent, on net. Similarly, more than 20 percent of domestic and foreign banks reported somewhat tighter standards on commercial real estate loans. No domestic banks indicated that they had eased standards on either C&I or commercial real estate loans.

Large fractions of banks also reported a further tightening of lending terms. For large and middle-market firms, 49 percent of domestic respondents and 43 percent of foreign branches and agencies, on net, reported higher premiums on riskier loans. In addition, more than a third of domestic banks, on net, charged higher fees and increased spreads of loan rates over their cost of funds. Significant fractions of foreign banks increased fees and reduced the maximum size of credit lines. For small firms, 36 percent of domestic banks reported charging higher spreads on riskier loans, and smaller fractions of banks also tightened all terms mentioned in the survey. Among both foreign and domestic banks that had tightened standards or terms on C&I loans, a less favorable or more uncertain economic outlook and a reduced tolerance for risk were most often reported as reasons for the tightening. A worsening of industry- specific problems was also mentioned by a substantial fraction of banks.

Almost 20 percent of domestic banks reported stronger loan demand from large and middle-market firms, while more than 25 percent saw weaker loan demand. A small net fraction of banks reported stronger demand from small firms. Domestic banks reporting stronger demand cited a wide variety of reasons as important; banks reporting weaker demand for C&I loans most commonly cited reduced business fixed investment as the reason. Meanwhile, 45 percent of the foreign branches and agencies, on net, reported weaker demand for C&I loans, reflecting reduced need for merger and acquisition financing and increases in their customers internally generated funds. On net, a small fraction of domestic banks reported moderately stronger demand for commercial real estate loans; in contrast, 25 percent of foreign respondents reported weaker demand.

Two special questions addressed the extent to which C&I lending has been affected by developments in the market for below-investment grade bonds over the past year. A large fraction of domestic respondents, and more than 40 percent of large banks, reported that demand has been somewhat strengthened by below-investment grade borrowers that have turned to banks because of unfavorable conditions in the high- yield bond market. Out of sixteen banks that reported additional demand, ten reported having been fairly receptive, five reported having been fairly unreceptive, and one bank reported having been very unreceptive to these customers. Almost half of the branches and agencies reported stronger demand, with most having been fairly receptive.

Lending to Households
(Table 1, questions 10-19)

The decrease in the demand for home mortgage loans continued in May. On net, 43 percent of respondents reported weaker demand than three months ago. Banks have now reported weaker demand for home mortgage loans, on net, for four consecutive quarters. Over the past three months, three banks eased their credit standards for approving residential mortgage loans, with all others keeping standards unchanged.

A special question revealed that terms on residential mortgage loans are generally less stringent, on net, than they were two years ago. On net, almost half of the banks surveyed have increased the maximum size of residential mortgages that they are willing to approve, about 30 percent have reduced the spread of loan rates over their banks cost of funds. About 20 percent of domestic respondents, on net, also indicated that they have lowered origination fees relative to two years ago.

On balance, banks indicated that they are more willing to make high loan-to-value loans than they were two years ago. More than 30 percent of the respondents noted that they have eased their down-payment requirements, while just three banks reported that they had tightened requirements. Nonetheless, more than half of residential mortgage loans originated at banks in the past three months had a down-payment greater than 20 percent, and almost 80 percent of loans were made with more than 10 percent down.

A small number of domestic banks reported less willingness to make consumer installment loans as compared with three months ago. Standards and terms for both credit card and other consumer loans also remained unchanged at most banks. However, a few banks reported a moderate tightening of standards, and about 10 percent of banks, on net, reported charging higher spreads over banks cost of funds on consumer loans other than credit card loans. On net, 22 percent of domestic banks reported moderately weaker demand for all types of consumer loans.

Loans to Purchase and Carry Securities
(Table 1, questions 20-24; Table 2, questions 10-14)

Loans to purchase and carry securities expanded rapidly late last year and in the early months of 2000; a series of special questions addressed banks activities in the market for such loans.¹ Domestic respondents indicated that the expansion of security loans resulted from a significant increase in demand from nonbank brokers and dealers; many also noted increased demand from private banking and other retail customers.² One bank noted that the broker-dealers were in turn using the loans to finance their customers, and another reported that the demand was being spurred by high equity values.

Domestic banks reported that 62 percent of their loans to purchase and carry securities were made to nonbank brokers and dealers, while 28 percent went to private banking and other retail customers. At branches and agencies of foreign banks, almost all security loans were made to nonbank brokers and dealers, mutual funds, or other financial institutions. Only a minority of security loans at domestic and foreign banks are made under commitment.

Banks accounting for 75 percent of all security loans at domestic respondents reported that more than three-quarters of their loans to purchase and carry securities are collateralized. Equity instruments are the most common forms of collateral, especially for retail customers. At branches and agencies, collateral was somewhat less common and was more likely to be U.S. government securities or other debt instruments.

     2. Responses are weighted by the weekly average of security loans outstanding in April.

The charts and tables for this report are available in Acrobat (PDF) format. Obtaining the Acrobat Reader

Charts (15.5 KB PDF)
Measures of lending practices from current and previous surveys
Chart data (ASCII)

Table 1 (35.6 KB PDF)
Summary of responses from U.S. banks

Table 2 (18.7 KB PDF)
Summary of responses from branches and agencies of foreign banks

Full report (86 KB PDF)