FRB: Senior Loan Officer Opinion Survey: July 2010

July 2010

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

The July 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 a set of special questions that asked respondents about lending to European firms and their affiliates and subsidiaries. This summary is based on responses from 57 domestic banks and 23 U.S. branches and agencies of foreign banks. ¹

The July survey indicated that, on net, banks had eased standards and terms over the previous three months on loans in some categories, particularly those categories affected by competitive pressures from other banks or from nonbank lenders.² While the survey results suggest that lending conditions are beginning to ease, the improvement to date has been concentrated at large domestic banks.³ Most banks reported that demand for business and consumer loans was about unchanged.

Domestic survey respondents reported having eased standards and most terms on C&I loans to firms of all sizes, a move that continues a modest unwinding of the widespread tightening that occurred over the past few years. Moreover, this is the first survey that has shown an easing of standards on C&I loans to small firms since late 2006.⁴ Significant net fractions of domestic banks also reported having eased their pricing of C&I loans to firms of all sizes. Banks pointed to increased competition in the market for C&I loans as an important factor behind the recent easing of terms and standards. Demand for C&I loans from large and middle-market firms and from small firms was reportedly little changed, on net, over the survey period after declining over the three months prior to the April survey.

On net, large domestic banks reported having easing standards and terms on almost all of the different categories of loans to households. Other banks showed either smaller net fractions having eased lending policies or a net tightening of lending policies. Regarding residential real estate lending, a few large banks reported having eased standards on prime mortgage loans, while a modest net fraction of the remaining banks reported having tightened standards on such loans. Banks reported an increased willingness to make consumer installment loans, on balance, for the third consecutive quarter, and small net fractions of banks reported having eased standards on both credit card and other consumer loans. By contrast, small net fractions of respondents reported having tightened the terms and conditions on credit card loans.

Business Lending
(Table 1, questions 1-14, 25; Table 2, questions 1-15)

Questions on commercial and industrial lending. The results of the July survey indicated that a modest net fraction of domestic respondents had eased standards for lending to large and middle-market firms over the previous three months--the second consecutive survey showing such an easing. For the first time since 2006, banks reported having eased their lending standards on C&I loans to small firms. In particular, around one-fifth of large domestic banks reported having eased lending standards for small firms, which offset a net tightening of standards by a small fraction of other banks.

Many banks indicated that they had eased terms on C&I loans, with especially sizable net fractions of domestic banks reporting that they had reduced spreads of loan rates over their bank's cost of funds and had trimmed the costs of credit lines. On net, large domestic banks had eased each of the seven surveyed loan terms for firms of all sizes. Other domestic banks reported a net easing of the spread of loan rates over their own cost of funds and of the costs associated with credit lines, but small net fractions of those banks had increased premiums for riskier borrowers and had tightened the majority of nonprice loan terms, particularly loan covenants. Domestic banks also reported that they had stopped reducing the size of existing credit lines for commercial and industrial firms, on net--the first time that banks had not reported cutting such lines since these questions were added to the survey in January 2009.

Nearly all of the respondents that reported having eased standards or terms on C&I loans cited more aggressive competition from other banks or nonbank lenders (other financial intermediaries or the capital markets) as an important reason for doing so, and about one-half of the respondents that eased pointed to a more favorable or less uncertain economic outlook. Respondents that had tightened lending policies--primarily smaller banks in the sample--generally attributed the move to a less favorable or more uncertain economic outlook, rather than bank-specific factors such as concerns about their capital or liquidity positions.

On balance, demand for C&I loans from large and middle-market firms and from small firms changed little in the July survey. In the April survey, banks had reported weaker demand from firms of all sizes. A shift in customer borrowing to their bank from other credit sources and customers' increased financing needs for inventory and receivables were the most common reasons cited in the current survey by banks that had experienced higher loan demand. The net percentage of respondents that pointed to customers' increased investment in plant or equipment as an important reason for stronger demand for C&I loans also edged up relative to the April survey.

In the July survey, U.S. branches and agencies of foreign banks reported that their standards for approving C&I loans had remained basically unchanged, after having reported a net easing of such standards in April. Small net fractions of foreign respondents still reported having eased most loan terms in the current survey, but the reported easing was much less widespread than in the April survey. Moreover, branches and agencies had tightened premiums charged on riskier loans, on balance. A modest net fraction of branches and agencies of foreign banks reported that demand had been stronger over the previous three months.

Special questions on lending to European firms and their affiliates and subsidiaries. A set of special questions asked respondents about lending to firms headquartered in Europe--both nonfinancial companies and banks, as well as their affiliates and subsidiaries. Only about 22 of the 57 domestic respondents indicated that they made loans or extended credit lines to European firms. While only small net percentages of domestic and foreign respondents indicated that their standards and terms on loans to European nonfinancial companies had tightened, somewhat larger net fraction indicated that they had tightened their policies for lending to European banks. Both domestic and foreign respondents indicated, on net, almost no change in demand for loans from European firms or their affiliates or subsidiaries. However, modest net percentages of respondents of both types reported that the number of inquiries regarding the availability of new or increased lines of credit from European borrowers had risen over the past three months.

Questions on commercial real estate lending. In the July survey, most respondents reported no change in their bank's standards for approving commercial real estate loans. The net percentage of banks that reported that their standards had tightened was small, and it dropped slightly relative to the April survey. Overall, the net fraction of banks that reported that demand for CRE loans had decreased continued to be small.

Lending to Households
(Table 1, questions 15-25)

Questions on residential real estate lending. On net, a small fraction of domestic banks reported having eased standards on prime residential mortgage loans; the few respondents that had eased standards were all large banks. The increase in demand over the past few months for prime residential mortgage loans reported by several respondents to the current survey marked a reversal of the net weakening of demand for such loans reported in the April survey. Fewer than one-half of survey respondents indicated that their bank originated nontraditional mortgage loans. Of these respondents, nearly all reported no change in their bank's standards for extending such loans. The small number of banks that reported an increase in demand for nontraditional mortgage loans balanced the number of banks that reported a decrease in demand. In the April survey, one-third of banks, on net, reported that demand for nontraditional mortgage loans had weakened.

A small share of respondents reported that their bank's standards for approving home equity lines of credit (HELOCs) had eased over the past three months. However, a similar fraction of respondents indicated that they had decreased the size of HELOCs for existing customers over the same period. A small net percentage of banks reported that demand for HELOCs had weakened, on net, down sharply from the April survey.

Questions on consumer lending. The net percentage of respondents that reported an increased willingness to make consumer installment loans increased relative to three months ago, extending the upward trend that it has exhibited in recent quarters, reaching the upper end of its range over the past decade. Consistent with this increased willingness, respondents, on net, reported a net easing of standards for approving consumer loans other than credit card loans. However, terms on consumer loans other than credit card loans were reported to have been roughly unchanged, on net, in the July survey.

Indicators of changes in standards and terms for approving applications for credit card loans were mixed. A few banks reported having eased standards, but small net fractions of respondents indicated that they had tightened terms and conditions on credit card accounts. Moreover, a small fraction of banks, on net, reported having reduced the size of credit card lines for existing customers, though that fraction has decreased noticeably over the past few surveys. Large banks reported a net easing of terms on credit card loans, while other banks reported a net tightening.

On balance, a small percentage of respondents indicated that demand for consumer loans of all types had weakened. A modest net percentage of large banks reported an increase in demand for the second consecutive quarter, but a slightly larger net percentage of other banks reported a decrease in such demand.

¹Respondent banks received the survey on or after July 13, 2010, and responses were due by July 27, 2010. Return to text

²For questions that ask about lending standards or terms, reported net percentages equal the percentage of banks that reported having tightened standards ("tightened considerably" or "tightened somewhat") minus the percentage of banks that reported having eased 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 defined as banks with assets greater than $20 billion as of March 31, 2010. Return to text

⁴Small firms are generally defined as firms with annual sales of less than $50 million. Return to text

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