FRB: Senior Loan Officer Opinion Survey: July 2011

July 2011

The July 2011 Senior Loan Officer Opinion Survey on Bank Lending Practices

The July 2011 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. This summary is based on responses from 55 domestic banks and 22 U.S. branches and agencies of foreign banks (hereafter referred to as foreign banks).¹

The July survey indicated that, on net, banks continued to ease lending standards and most terms on all major types of loans other than loans secured by real estate over the past three months.² Modest net fractions of respondents noted an increase in demand for commercial and industrial (C&I) and commercial real estate (CRE) loans over the same period; at the same time, banks reportedly experienced, on net, slightly weaker demand for some categories of residential real estate loans. In response to a special question, most banks indicated that they expected originations of residential real estate loans in the second half of 2011 to be about the same as in the first half of the year. Significant fractions of respondents to another special question indicated that, for most loan categories, the current level of lending standards was tighter than the middle of its recent historical range, though the reported degrees of tightness varied noticeably across categories.

Domestic banks further eased standards on C&I loans to firms of all sizes over the past three months. The net fraction of banks that reported easing on loans to smaller firms remained relatively low and below the net fraction that reportedly eased for large and middle-market firms.³ On net, domestic and foreign banks indicated that they had eased most terms on C&I loans over the survey period, and the reported easing was especially pronounced for price-related terms. As in the past several surveys, the most commonly cited reason for having eased standards or terms on C&I loans was increased competition from other lenders. Modest net fractions of domestic and foreign banks continued to report an increase in demand for C&I loans over the past three months.

Domestic banks indicated that standards on both commercial and residential real estate loans were about unchanged over the past three months. The net portion of domestic respondents indicating an increase in demand for CRE loans in the current survey declined in comparison with the April survey. In contrast, small net fractions of respondents indicated that demand for both prime and nontraditional residential real estate loans as well as for home equity lines of credit had weakened or remained basically unchanged over the survey period.

With respect to consumer lending, the net percentages of banks that reported easing standards were low and roughly in line with the previous survey. While positive net fractions of respondents reportedly experienced an increase in demand for both credit card and auto loans over the past three months, the pickup in demand was not widespread; moreover, demand for other consumer loans was about unchanged.

Business Lending
(Table 1, questions 1-8, 25; Table 2, questions 1-9)

Questions on commercial and industrial lending. The net fraction of domestic banks that indicated that they had eased standards on C&I loans to large and middle-market firms rose slightly to around 20 percent. On net, fewer domestic banks--about 10 percent--indicated an easing of standards on loans to smaller firms. On balance, domestic banks eased all of the surveyed terms on C&I loans to large and middle-market firms, with the most sizable net fractions of respondents reporting easing of price terms, including the spread of loan rates over banks' cost of funds, the use of interest rate floors, and the cost of credit lines. Domestic survey respondents also indicated some easing of loan terms for smaller firms, though the reported easing was less widespread than for loans to larger firms. For standards and for most terms on C&I loans, reported easing among domestic survey respondents was concentrated at large banks. ⁴ Of foreign banks, almost all indicated that standards on C&I loans had remained basically unchanged, though between 5 and 35 percent reported easing various C&I loan terms on balance.

Among both domestic and foreign banks that had eased standards or terms on C&I lending loans, the most commonly cited reason for doing so was more aggressive competition from other banks or nonbank lenders. A number of domestic banks also pointed to a more favorable or less uncertain economic outlook as an important reason for the change in their lending policies. The reasons most widely cited by domestic banks that reported that they had tightened C&I lending standards and terms over the past three months were a less favorable or more uncertain economic outlook, and increased concerns about the effects of legislative changes, supervisory actions, or changes in accounting standards.

A modest net fraction of domestic respondents indicated that demand for C&I loans from large and middle-market firms had increased over the past three months, while the net fraction that reported stronger loan demand from smaller firms was close to zero. Most domestic banks that experienced a strengthening of demand cited a shift to bank borrowing from other funding sources as an important reason for the change in demand, as well as to an increase in customers' inventory financing needs. About 20 percent of foreign banks, on net, reported in the July survey that demand for C&I loans had increased.

A special question in the July survey asked respondents to describe the current level of lending standards at their bank for several loan categories. Loan officers were asked to report how their current lending stance stood, relative to the range defined by the easiest and tightest standards applied by their bank since 2005. For different types of C&I loans, between 25 and 50 percent of domestic respondents indicated that their bank's current lending standards were near the middle of that range. Of the remaining domestic respondents, more indicated that their current levels of standards on C&I loans were tighter than the middle of the range, compared with the number that indicated that standards were easier than the middle of the range. The margin by which the number of banks with standards that were tighter than the midpoint exceeded the number of banks with standards that were easier than the midpoint varied according to borrower credit quality classification, loan syndication status, and borrower size. This margin was largest for non-investment-grade syndicated loans and nonsyndicated loans to smaller firms, as compared with investment-grade syndicated loans and nonsyndicated loans to large and middle-market firms. Foreign banks' responses for syndicated loans were about the same as those of domestic banks. By contrast, foreign banks were somewhat more likely than domestic banks to characterize the current level of standards as being tighter than the middle of their range for nonsyndicated loans to large and middle-market firms.

Questions on commercial real estate lending. The net fraction of domestic banks that reported that they had eased standards on CRE loans over the past three months remained close to zero, about the same as in the previous two surveys. Though few domestic banks have indicated any change in CRE standards over the past year, the July survey's special question revealed that standards for all types of CRE lending remain tight relative to the range that has prevailed since 2005 at most banks. Indeed, roughly 75 percent of domestic respondents indicated that their bank's standards for construction and land development (CLD) loans were tighter than the middle of the range that these standards have occupied since 2005, with nearly one third of banks stating that standards on CLD loans were currently at their tightest level seen over this period. While fewer banks indicated that standards were at their tightest levels for nonfarm nonresidential CRE loans and for multifamily CRE loans, a majority of domestic respondents noted that their current level of standards was tighter than the middle of its recent historical range for these lending categories as well. Nearly 25 percent of foreign respondents reported that their CRE lending standards had eased, on net, over the past three months. Nearly all foreign banks indicated that their current level of standards was at or tighter than the middle of its recent historical range for all types of CRE loans.

On net, more than one-third of large domestic banks described demand for CRE loans as having strengthened over the previous three months, while smaller banks indicated that demand for such loans had remained about unchanged on net. Of the foreign banks, about 15 percent noted an increase in demand.

Lending to Households
(Table 1, questions 9-25)

Questions on residential real estate lending. On net, banks reported that standards on residential real estate loans were little changed for both prime and nontraditional loans over the past three months. About 10 percent of respondents, on net, indicated that they had eased standards on home equity lines of credit. Demand for prime residential mortgages was reportedly little changed, on net, while a small net fraction of banks indicated a weakening of demand for nontraditional residential mortgages.

For categories of residential real estate lending including prime mortgages, nontraditional mortgages, and home equity lines of credit, between about 10 and 15 percent of respondents to the special question described the current level of their lending standards as being easier than the middle of the range that standards have occupied since 2005. Significantly larger fractions indicated that standards were tighter than the middle of the range, and the remaining respondents indicated that standards were near the middle of the range.

Another special question queried banks about whether they expected their originations of residential real estate loans, which were quite weak, in the aggregate, over the first half of 2011, to increase or decrease over the remainder of this year. About three-quarters of banks reported that they expected the pace of their originations to remain at about the same level through the rest of 2011; the remaining respondents were roughly split between those that expected an increase and those that expected a decrease in the pace of originations. A follow-up question asked banks that did not anticipate any increase why they expected their originations to remain flat or to decrease. All respondents to this question cited reduced or unchanged demand from creditworthy borrowers and almost all of these respondents also pointed to unfavorable or uncertain forecasts for the broad economy and for house prices. Another common but less frequently cited reason for the expected lack of expansion in originations was increased concerns about the effects of legislative changes, supervisory actions, or changes in accounting standards.

Questions on consumer lending. Moderate net fractions of banks reportedly eased their lending standards on consumer loans over the past three months. For credit card loans and for consumer loans other than credit card and auto loans, positive net fractions of banks reported having eased standards, but these fractions were less than 10 percent. For auto loans, the fraction that reported easing standards was more substantial, at nearly 20 percent. For all three consumer loan categories, the net fraction of large banks reporting an easing of standards was greater than the corresponding fraction of other banks. With respect to loan terms, banks eased some of the surveyed terms, on balance, but most banks reported no change in most terms; in addition, the indicated easing in terms was slightly more widespread for auto than for other consumer loans.

In the special questions on the level of standards, roughly one-third of respondent banks described the current level of their standards for auto loans as being tighter than the middle of the range at their bank since 2005, while the corresponding percentages for credit card and other consumer loans were over 50 percent. For all three consumer loan types, the majority of the remaining banks reported that the current level of standards was near the middle of its recent historical range.

A moderate net fraction of banks reportedly experienced an increase in demand for auto loans over the past three months. In contrast, the reported demand for credit card and other consumer loans was about unchanged, on net.

¹ Respondent banks received the survey on or after July 12, 2011, and responses were due by July 26, 2011. Return to text

² For 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

³ Large and middle-market firms are generally defined as firms with annual sales of $50 million or more and small firms as those with annual sales of less than $50 million. Return to text

⁴ Large banks are defined as banks with assets greater than $20 billion as of March 31, 2011, and other banks as those with assets of less than $20 billion. Return to text

This document was prepared by Mary Beth Chosak with the assistance of Sam Haltenhof and Ben Rump, Division of Monetary Affairs, Board of Governors of the Federal Reserve System.