FRB: Senior Loan Officer Opinion Survey: April 2010

April 2010

The April 2010 Senior Loan Officer Opinion Survey on Bank Lending Practices

The April 2010 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. The survey included three sets of special questions. The first set asked banks about lending policies regarding business credit card accounts for use by small firms. The second set queried banks about the use of loan extensions on commercial real estate loans. The last set asked banks about the effects on their lending standards and terms of the adoption of new accounting standards issued by the Financial Accounting Standards Board. This summary is based on responses from 56 domestic banks and 23 U.S. branches and agencies of foreign banks.¹

The April survey indicated that most banks kept their lending standards unchanged in the first quarter, but that moderate net fractions of banks further tightened many terms on loans to businesses and households. For almost all loan categories for which the survey indicated a further net tightening of credit standards, the fraction of banks that reported having done so edged down and in a few categories banks eased standards, on net.² The survey also indicated that loan demand generally weakened further.

Most of the banks that reported having eased some lending policies in the April survey were large banks.³ A number of large domestic banks eased standards and some terms on commercial and industrial (C&I) loans to large and middle-market firms. Branches and agencies of foreign banks also reported easing standards and terms on C&I loans, on net. However, standards on C&I loans to small firms were roughly unchanged, and terms on such loans were tightened further over the past three months. Turning to lending to households, large bank respondents eased standards, on balance, for both prime residential mortgages and home equity lines of credit, while other banks tightened standards for both categories of lending. On net, large domestic banks accounted for an easing of standards on non-credit-card consumer loans. In contrast, modest net fractions of large and other domestic banks continued to tighten standards and terms on credit card loans over the past three months.

Domestic survey respondents indicated that demand weakened further for all loan types. A decline in demand for prime residential real estate loans was reported by a larger net fraction of domestic banks than in the January survey, but for other types of loans the net fractions of banks that reported weaker demand continued to wane. Indeed, branches and agencies of foreign banks reported an increase in demand for C&I loans, on net, over the past three months.

Lending to Businesses
(Table 1, questions 1-13, 24; Table 2, questions 1-10)

Questions on commercial and industrial lending. On balance, a small net fraction of banks reported easing their lending standards on C&I loans to large and medium-sized firms. The previous survey in January showed the first net easing of standards on such loans since the onset of the financial crisis in the summer of 2007. While the net fraction of banks that eased standards on these loans in the April survey increased only slightly, the latest survey marked the first time since 2006 that banks reportedly eased standards in two consecutive quarters. However, standards likely remain quite stringent following the prolonged and widespread tightening that took place over the past few years.

Among domestic institutions, large banks were responsible for the reported easing of standards to larger C&I borrowers. None of the smaller banks, which compose roughly half of the respondent panel, indicated that they had eased their standards on C&I loans to large firms over the past three months. On net, a small fraction of branches and agencies of foreign banks participating in the survey reported easing standards on C&I loans. Large domestic banks also eased some terms on C&I loans for large and middle-market firms, on net, as did the foreign branches and agencies. On balance, the large domestic institutions mostly trimmed their pricing terms, including the cost of credit lines and the spreads of loan rates over their costs of funds, while the branches and agencies eased each of the seven surveyed C&I lending terms, on net.

When asked about standards on C&I loans to smaller firms, almost all domestic banks, regardless of size, reported little change. However, net fractions of domestic institutions reported tightening terms on C&I loans extended to smaller firms. This reported tightening of terms was more prevalent at smaller banks. Notably, the net fraction of banks that had increased premiums on loans to riskier borrowers remained fairly elevated in the April survey.

According to the survey, the three factors that exerted the greatest influence on banks' C&I lending policies over the past three months were competitive pressures, the economic outlook, and tolerance for risk in the C&I loan market. In particular, domestic banks that eased their C&I lending standards pointed to increased competition from other banks or nonbank sources of credit as an important factor in their decision. Also, about two-thirds of such banks cited a more favorable or less uncertain economic outlook. Only a few banks reported having eased lending policies in response to an increased tolerance for risk. By contrast, banks that tightened standards or terms on C&I loans generally indicated that they viewed the economic outlook as less favorable or more uncertain and also reported further reductions in their tolerance for risk.

Small net fractions of banks reported that demand for C&I loans from large and middle-market firms and from small firms weakened further over the past three months. The reported weakening in loan demand was concentrated at smaller domestic banks, while large domestic banks reported little change in demand on net. A moderate net fraction of foreign banks indicated that demand for C&I loans strengthened over the same period. Nearly all of the domestic respondents that reported weaker demand cited borrowers' reduced need to finance plant and equipment investment, and large majorities also indicated that demand for inventory and accounts receivable financing declined. Among the domestic banks that reported increased demand for C&I loans, the most commonly cited reasons were increased needs to finance inventories and accounts receivable and a pickup in mergers and acquisitions. About half of those banks also reported having seen a shift of demand to their bank from other sources of external finance.

Special questions on credit card loans to small firms. The April survey included a set of special questions that asked domestic banks about standards and terms on credit cards for use by small firms. A majority of respondents indicated that their standards for approving such business credit card accounts are currently tighter than the longer-run average level that prevailed before the crisis. In addition, significant net fractions of respondents to these special questions indicated that their banks had tightened their terms on business credit card loans to small firms--for both new and existing accounts--over the past six months.

Questions on commercial real estate lending. A significant number of domestic banks, on balance, continued to report having tightened standards on CRE loans. However, this net fraction was considerably smaller than in the January survey. As in the previous survey, domestic banks reported weaker demand for CRE loans, on net. However, in the latest survey, the net fraction of banks reporting weaker demand moved below 10 percent for the first time since the financial crisis began. In contrast, branches and agencies of foreign banks reported no change in CRE lending standards, on balance, and a small net fraction of these respondents experienced an increase in demand for CRE loans.

Special question on the use of CRE loan extensions. In response to a special question, sizable fractions of both domestic and foreign respondents reported having increased their use of CRE loan extensions over the previous six months.⁴ Only two domestic banks and one foreign bank reported having reduced their use of loan extensions during that period.

Lending to Households
(Table 1, questions 14-24)

Questions on residential real estate lending. With regard to loans secured by residential real estate, most banks reported essentially no change in their standards on prime and nontraditional mortgages over the past three months. The April survey results included the first net easing of standards on home equity lines of credit since the question was first asked in January 2008. Compared with the January survey, a more sizable fraction of banks indicated that demand for prime mortgages weakened over the past three months and a fairly large net fraction of banks also reported that demand for home equity loans weakened over the survey period.

Questions on consumer lending. On balance, domestic banks reported tightening their lending standards and terms for credit cards, but their lending stance toward other consumer loans eased. A small net fraction of banks reported having tightened standards for credit cards, and moderate fractions reported having reduced credit limits and increased spreads of interest rates charged on outstanding credit card balances. The further tightening of standards and terms on credit card loans, however, did not carry over into other consumer loans, as small net fractions of banks reported having eased standards and reduced spreads for such loans. Moreover, the net fraction of banks that reported an increased willingness to make consumer installment loans increased again. As in recent quarters, a moderate net fraction of respondents reported weaker demand for consumer loans of all types.

Special question on Statements of Financial Accounting Standards Nos. 166 and 167 (FAS 166 and 167). A final special question on the April survey asked banks whether their lending policies for businesses and households had changed in response to FAS 166 and 167, new accounting rules that most banking institutions adopted with their first-quarter financial statements.⁵ No respondents to this question indicated that their banks' lending standards and terms had changed as a result of the new rules.

¹Respondent banks received the survey on or after March 30, 2010, and their responses were due on April 13, 2010. Return to text

²For questions that ask about lending standards or terms, reported net percentages equal the percentage of banks that reported tightening standards ("tightened considerably" or "tightened somewhat") minus the percentage of banks that reported easing standards ("eased considerably" or "eased somewhat"). For questions that ask about demand, reported net fractions equal the percentage of banks that reported stronger demand ("substantially stronger" or "moderately stronger") minus the percentage of banks that reported weaker demand ("substantially weaker" or "moderately weaker"). Return to text

³Large banks are institutions with more than $20 billion in total assets as reported on the December 31, 2009, Call Report. Return to text

⁴Survey respondents were instructed that for the purposes of the special question, a loan extension was to be defined as a modification of a loan at or near the end of the original term that extends the term of the loan, as opposed to a newly underwritten loan used to refinance a maturing loan. Return to text

⁵Published by the Financial Accounting Standards Board in June 2009, FAS 166 and 167 eliminated the concept of a "qualifying special-purpose entity" and made achieving off-balance-sheet treatment of assets much more difficult. For more information on FAS 166 and 167, please see Financial Accounting Standards Board (2009) "FASB Issues Statements 166 and 167 Pertaining to Special Purpose Entities," news release, June 12, www.fasb.org/cs/ Return to text

This document was prepared by Mary Beth Chosak with the assistance of Michael Levere, Division of Monetary Affairs, Board of Governors of the Federal Reserve System.