The April 2007 Senior Loan Officer Opinion Survey
on Bank Lending Practices

Note: Data for figure 3 revised on May 17, 2007.

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Table 1 | Table 2 | Chart data
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The April 2007 Senior Loan Officer Opinion Survey on Bank Lending Practices addressed changes in the supply of, and demand for, bank loans to businesses and households over the past three months. In light of recent developments in the subprime mortgage market, banks were queried separately about standards on and demand for prime, nontraditional, and subprime residential mortgages. This article is based on responses from fifty-three domestic banks and twenty foreign banking institutions.

Overall, the respondent banks reported mixed changes in lending standards and terms over the past three months and somewhat weaker demand for most loan types. Domestic and foreign institutions indicated that they had eased some terms on commercial and industrial (C&I) loans over the past three months, but that they had made few changes in credit standards on such loans. Domestic respondents reported that they had tightened credit standards on commercial real estate loans over the previous three months. Demand for both C&I and commercial real estate loans at domestic banks was reportedly weaker, on net, in the April survey. By contrast, foreign institutions noted that demand for both C&I and commercial real estate loans had not changed over the survey period.

With regard to loans to households, a relatively small net fraction of respondents reported having tightened lending standards on prime residential mortgages over the past three months, while considerable net fractions of respondents indicated that they had tightened lending standards on nontraditional and subprime mortgage loans. Moderate net fractions of domestic institutions indicated that they had experienced weaker demand for prime, nontraditional, and subprime residential mortgages, and a notable net percentage of institutions also reported weaker demand for consumer loans.

C&I Lending
(Table 1, questions 1-6; Table 2, questions 1-6) 

In the April survey, domestic institutions reported that lending standards on C&I loans to large and middle-market firms were little changed, on net, over the past three months. The respondents noted, however, that they had further eased some terms on C&I loans to such firms over the same period. About half of respondents—a slightly larger net fraction than in the January survey—indicated that they had trimmed spreads of loan rates over their cost of funds over the previous three months, and smaller net fractions reported that they had reduced the costs of credit lines and eased loan covenants.

Credit standards on C&I loans to small firms were reportedly about unchanged, on balance, in the April survey. Nonetheless, about one-third of the domestic banks, on net, indicated that they had trimmed spreads of loan rates over their cost of funds over the past three months, and smaller net fractions reported that they had reduced the cost of credit lines and reduced premiums charged on riskier loans.

As they did in the past few surveys, U.S. branches and agencies of foreign banks reported that their standards on C&I loans were essentially unchanged. However, notable net fractions of these institutions indicated that they had eased loan covenants and increased the maximum size of credit lines.

In the April survey, three-fourths of domestic banks and all U.S. branches and agencies of foreign banks that reported having eased their lending standards and terms pointed to more-aggressive competition from other banks or nonbank lenders as the most important reason for having done so. Considerable fractions of domestic and foreign institutions also cited increased liquidity in the secondary market for these loans as a reason for less-stringent business lending policies.

On net, about one-fifth of domestic respondents noted that they had experienced weaker demand for C&I loans from large and middle-market firms and from small firms. Domestic respondents that saw weaker demand for such loans attributed the softening to borrowers' increased use of internally generated funds and decreased needs to finance investment in plant or equipment, as well as to a shift in customer borrowing to another bank or to nonbank sources of credit. U.S. branches and agencies of foreign banks reported that demand for C&I loans was unchanged, on net, over the past three months.

Regarding future business, about 10 percent of domestic respondents—a slightly larger net percentage than in the January survey—reported that the number of inquiries from potential business borrowers had decreased over the previous three months. By contrast, foreign respondents indicated that the number of inquiries from potential business borrowers was unchanged in the April survey.

Commercial Real Estate Lending
(Table 1, questions 7-8; Table 2, questions 7-8)

About one-third of domestic institutions—a somewhat larger net fraction than in the previous survey—indicated that they had tightened lending standards on commercial real estate loans over the past three months. As in the January survey, 35 percent of domestic respondents noted that they had experienced weaker demand for such loans over the same period. By contrast, the vast majority of foreign respondents reported that lending standards on commercial real estate loans had remained basically unchanged in the April survey. Demand for such loans at these institutions was also said to be essentially unchanged over the past three months.

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

In order to track developments regarding the major categories of residential real estate loans, the April survey asked banks to report separately changes in standards on and demand for prime, nontraditional, and subprime residential mortgages. A large majority of respondents indicated that standards on prime residential mortgages had remained basically unchanged over the past three months, with 15 percent reporting somewhat tighter standards. Of the forty-four domestic institutions that originated nontraditional residential mortgages, 45 percent noted a tightening of standards on such loans, whereas the rest reported that their standards had remained basically unchanged. ¹ Similarly, of the sixteen institutions that indicated that they had originated subprime residential mortgages, more than half of respondents, on net, reported that they had tightened standards on such loans.²

Tighter standards on subprime and nontraditional mortgage loans generally were not associated with a move toward more-stringent lending policies for prime mortgages. Indeed, of the nine institutions that reported having tightened standards on subprime residential mortgages, only one indicated that it had also tightened standards on prime residential mortgages. Five of the twenty institutions that reported tightening standards on nontraditional mortgages also tightened standards on prime mortgages.

On net, about one-fifth of domestic institutions indicated that they had seen weaker demand for each of the three categories of residential mortgages—prime, nontraditional, and subprime—over the past three months.

On balance, almost 10 percent of domestic respondents indicated that their willingness to make consumer installment loans had increased in the April survey. About 10 percent of institutions, on net, reported that they had eased lending standards on credit card loans over the past three months, whereas a small net fraction of respondents noted that they had tightened somewhat their lending standards on non-credit-card loans over the same period. On balance, terms on all types of consumer loans were reportedly little changed over the past three months. About one-fourth of domestic institutions indicated that they had experienced weaker demand for consumer loans, a somewhat smaller net fraction than in the January survey.

¹ These forty-four banks accounted for 67 percent of residential mortgage loans on the books of all commercial banks as of December 31, 2006.