Senior Loan Officer Opinion Survey on
Bank Lending Practices

The August 2000 Senior Loan Officer Opinion Survey on Bank Lending Practices focused on changes in the supply of and demand for bank loans to businesses and households over the past three months. Supplementary questions addressed banks' policies regarding business loans that are secured by collateral and their activities in the market for syndicated loans. The survey also included an additional question on the rapid growth of home mortgage loans in banks' portfolios this year. Loan officers from fifty-six domestic banks and twenty-two U.S. branches and agencies of foreign banks participated in the survey.

The results of the August survey indicate continued firming of business lending practices by a significant fraction of both domestic and foreign banks. Compared to the May survey, a larger fraction of domestic respondents reported tightening standards on commercial and industrial (C&I) loans. As in May, more than half of domestic banks and branches and agencies of foreign banks increased the premiums charged on riskier loans from three months earlier. The fraction of domestic banks that reported tightening lending standards in the market for commercial real estate loans also rose relative to the previous survey.

Banks, on net, reported slightly weaker demand for C&I loans in August relative to three months ago. A large fraction of foreign respondents noted a decrease in demand for commercial real estate loans, while relatively few domestic respondents, on net, reported weaker demand for this type of loan.

Responses indicate that domestic banks typically require collateral for C&I loans, especially when lending to small firms. A significant majority of domestic banks reported that more than three quarters of their small business loan outstandings are secured by collateral. Foreign branches and agencies generally reported much lower levels of collateralization in their business loan portfolio than domestic banks, likely reflecting, in part, a different mix of loans.

The survey also indicated that syndicated loans tend to be concentrated at large domestic banks and at foreign branches and agencies. Most banks that participate in this market noted that highly leveraged syndicated loans accounted for a relatively small share of their total loan portfolio. Moreover, most banks indicated that the delinquency rate on outstanding syndicated loans is generally comparable to, or lower than, the delinquency rate on other C&I loans.

Standards and terms on both residential mortgage loans and other loans to households were essentially unchanged in August relative to three months ago. Demand for residential mortgage loans weakened, on net, for the fifth consecutive quarter. On net, domestic banks also reported weaker demand for consumer loans over the past three months.

Lending to Businesses
(Table 1, questions 1-5, 8-9; Table 2, questions 1-5, 8-9)

About 34 percent of domestic banks reported that they had tightened standards somewhat over the past three months on C&I loans to large and middle-market firms, and 24 percent tightened standards on loans to small firms over the same period. As in the past two surveys, no domestic bank reported easing standards. The percentage of domestic banks that tightened standards on business loans to large and middle- market firms increased 9 percentage points in August relative to the May survey, and for the second consecutive quarter, the tightening of standards was particularly notable at large banks. On net, almost a quarter of branches and agencies of foreign banks tightened standards on C&I loans.

Significant fractions of both domestic and foreign banks also reported tightening terms on C&I loans. Most strikingly, more than half of the domestic respondents indicated that they had increased premiums charged on riskier loans to large and middle-market firms, and a third did so for riskier loans to small firms. About a third of domestic banks noted charging a higher average spread relative to their bank's cost of funds and increasing the costs associated with credit lines. Among branches and agencies, 55 percent increased the premiums charged on riskier loans, 41 percent increased the costs associated with credit lines, and 32 percent charged higher spreads over their bank's cost of funds.

Among the domestic and foreign respondents that tightened standards or terms on C&I loans, a sizable majority of both pointed to a less favorable or more uncertain economic outlook as an important reason. In addition, about three-quarters of the foreign banks noted a worsening of industry-specific problems, while a good number of domestic banks cited a reduced tolerance for risk as well as a worsening of industry-specific problems as reasons for firming lending conditions in the business sector. A fair number of large domestic banks and foreign branches and agencies also identified an increase in defaults by below-investment-grade borrowers in the public debt markets as a reason for tightening standards and terms on C&I loans.

Over the past three months, about 25 percent of domestic banks reported weaker demand for business loans from large and middle-market firms, while 20 percent saw stronger demand. Demand from small firms was similarly mixed, leaving overall demand for C&I loans at domestic banks somewhat weaker, on net, over the period. Relative to the last survey, in which almost half of the foreign branches and agencies saw weaker demand, only 9 percent, on net, reported somewhat weaker demand for C&I loans over the past three months.

An increase (decrease) in customers' needs for merger and acquisition financing was most often identified as the reason for increased (decreased) demand for C&I loans at both domestic and foreign banks over the past three months. Domestic banks that experienced an increase in business loan demand also cited a shift in customer borrowing from other less attractive sources. As for domestic banks reporting a decrease in demand, reduced capital expenditures by their customers was frequently given as a reason.

The fraction of domestic respondents that indicated that they had tightened standards on commercial real estate loans over the past three months increased to 32 percent in August, up from 22 percent in the May survey. In contrast, most branches and agencies of foreign banks reported no change in standards on commercial real estate loans. On net, 33 percent of foreign respondents reported weaker demand for commercial real estate loans over the past three months; however, only a small fraction of domestic banks, on net, noted weaker demand for this type of loan in the August survey.

C&I Loans Secured by Collateral
(Table 1, questions 6-7; Table 2, questions 6-7)

The survey included two special questions about C&I loans secured by collateral. More than 70 percent of domestic banks indicated that the majority of the dollar volume of outstanding C&I loans to large and middle-market firms is collateralized. In contrast, half of the foreign banks said that less than a quarter of their outstanding dollar volume of business loans was collateralized. For loans to small firms, almost all domestic banks reported that at least half of their outstandings were collateralized, and nearly 80 percent of banks reported that more than three-quarters of their small business loans were secured by collateral.

At domestic banks, the vast majority of collateralized loans to both small and large firms are secured by accounts receivable, inventories, and capital equipment. At branches and agencies of foreign banks, equity of a subsidiary of the company receiving the loan is the most common form of collateral, followed by accounts receivable and inventories. The differences between foreign and domestic banks in the fraction of business loans that are secured by collateral and the types of collateral accepted likely reflect, in part, differences in the mix of borrowers.

Lending to Households
(Table 1, questions 10-18)

Over the past three months, 51 out of 53 domestic banks reported no change in standards on residential mortgage loans. On net, 40 percent of respondents reported somewhat weaker demand for mortgages to purchase homes relative to three months ago. This marks the fifth consecutive quarter that banks have reported weaker demand for home mortgages.

Despite the reports of somewhat weaker demand for mortgages to purchase homes in recent Senior Loan Officer Opinion Surveys and signs that the market for residential real estate has cooled, growth of residential real estate loans held by banks has remained strong this year. A majority of banks attributed this strength to home sales in their market area, which though below their high levels of last year, have remained robust. In addition, many banks reported making more adjustable rate mortgages (ARMs) that are less likely to be securitized, because they better match the duration of banks' liabilities. Also boosting residential real estate loans at banks was a rising share of hybrid ARMs (such as those that maintain a fixed rate for 3, 5, 7, or 10 years). These types of loans tend to remain on banks' books, because they are relatively more difficult to securitize. Some banks also indicated that securitization had been damped by an increase in the share of loans that do not conform to the size limit set by Fannie Mae and Freddie Mac.

Domestic banks indicated almost no change in their willingness to make consumer installment loans over the past three months, and standards and terms on all types of consumer loans were also largely unchanged in the August survey. Demand for consumer loans declined, on net, relative to three months ago. About 20 percent of large banks, on net, reported weaker demand, while at other banks the demand was essentially unchanged, on net, from three months earlier.

Syndicated Loans
(Table 1, questions 19-21; Table 2, questions 10-12)

The August survey included three special questions about banks' activities in the market for syndicated loans. The responses revealed quite a bit of variation in banks' participation in this market. About 40 percent of large domestic banks reported that syndicated loans made up less than 20 percent of their outstanding C&I loan volume. However, almost a quarter of large domestic banks and more than three-quarters of foreign branches and agencies indicated that syndicated loans accounted for at least half of their business loan portfolio. The survey responses indicate that the smaller domestic banks on the panel engage in relatively little syndicated lending.

Almost 60 percent of both large domestic and foreign banks reported that no more than 15 percent of the syndicated loans on their books are considered highly leveraged (made to below-investment-grade borrowers at more than 250 basis points over LIBOR). Only one large domestic bank and two foreign banks noted that highly leveraged syndicated loans account for more than half of their syndicated loan portfolio. Consistent with the relatively small share of highly leveraged syndicated loans on their books, domestic banks, on balance, said that the delinquency rate on their syndicated loan portfolio was somewhat lower than the delinquency rate on their traditional C&I loans. At branches and agencies, delinquency rates on the two classes of loans were generally comparable

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

Charts (11.7 KB PDF)
Measures of lending practices from current and previous surveys
Chart data (ASCII)

Table 1 (25.1 KB PDF)
Summary of responses from U.S. banks

Table 2 (13.0 KB PDF)
Summary of responses from branches and agencies of foreign banks

Full report (268 KB PDF)