FRB: Senior Loan Officer Opinion Survey: January 2014

January 2014

The January 2014 Senior Loan Officer Opinion Survey on Bank Lending Practices

The January 2014 Senior Loan Officer Opinion Survey on Bank Lending Practices addressed changes in the standards and terms on, and demand for, bank loans to businesses and households over the past three months. Domestic banks, on balance, reported having eased their lending standards on many types of business and consumer loans and having experienced increases in loan demand, on average, over the past three months. The survey contained two sets of special questions. The first set asked about effects of the supervisory guidance on leveraged lending issued on March 21, 2013. The second set of questions asked banks about the outlook for loan performance for different categories of lending over 2014. This summary is based on the responses from 75 domestic banks and 21 U.S. branches and agencies of foreign banks.¹

Regarding loans to businesses, the January survey results generally indicated that, on balance, banks eased their lending policies for commercial and industrial (C&I) loans to firms of all sizes and experienced stronger demand for such loans over the past three months.² Almost all domestic banks that eased their C&I lending policies cited increased competition for such loans as an important reason for having done so. A modest fraction of foreign respondents indicated, on net, that they had eased standards on C&I loans, and a moderate net fraction of such banks reported that demand for C&I loans had increased somewhat. In response to the special questions on the supervisory guidance on leveraged lending, a number of large domestic and foreign banks indicated that they had tightened standards on such loans. Those banks also reported that some leveraged loans had been curtailed or significantly altered by the guidance, but a majority of them believed that affected borrowers would be able to turn to other sources of funding.

On net, domestic institutions also reported having eased standards for most types of commercial real estate (CRE) loans and having experienced stronger demand for such loans. A modest net fraction of foreign respondents indicated that they had eased standards on CRE loans in the aggregate, while a large net fraction of such banks indicated that they had experienced stronger demand for such loans.

Changes in standards and terms on, and demand for, loans to households were mixed. The survey results indicated that a modest fraction of large banks had eased standards on prime residential real estate loans, but a similar fraction of small banks had tightened standards on such loans. A moderate fraction of banks reported, on balance, weaker demand for prime mortgage loans to purchase homes, and a large net fraction reported weaker demand for nontraditional mortgage loans. Demand for home equity lines of credit (HELOCs) was little changed. Respondents indicated that they had eased standards on credit card loans, auto loans, and other consumer loans. Most banks reported little change in most terms on consumer loans, with the exception of credit card limits and loan rate spreads on auto loans, which modest fractions of banks reported having eased on balance. Modest net fractions of banks reported increases in demand for all types of consumer loans.

Survey respondents were asked about their expectations for loan delinquency and charge-off rates in 2014, assuming that economic activity progresses in line with consensus forecasts. Both domestic and foreign respondents generally indicated that they anticipated improvements in the performance of business loans. Domestic banks also reported that they expected improved performance for most types of loans to households, with the exception of auto loans to subprime borrowers, for which they expected increasing delinquency and charge-off rates in 2014.

Business Lending
(Table 1, questions 1-17; Table 2, questions 1-13)

Questions on commercial and industrial lending. A modest fraction of domestic survey respondents, on net, indicated that they had eased their standards for C&I loans to large and middle-market firms over the fourth quarter of 2013.³ Standards on loans to small firms remained basically unchanged. On balance, banks reported having eased almost all terms on C&I loans, regardless of firm size. In particular, a large net fraction of respondents indicated that they had decreased spreads on C&I loan rates over their bank's cost of funds for all firm sizes. In addition, moderate net fractions of banks reported having reduced the cost of credit lines and decreased the use of interest rate floors for all firm sizes. A moderate fraction of banks also reported, on net, that they had eased loan covenants, though primarily to large and middle-market firms.

Among domestic respondents that reported having eased either standards or terms on C&I loans over the past three months, the majority of banks cited more-aggressive competition from other banks or nonbank lenders as an important reason for having done so. In addition, about half of respondents that reported having eased their C&I loan policies cited a more favorable or less uncertain economic outlook as a reason for having done so, a larger fraction than in the October 2013 survey. About one-fourth of domestic respondents that eased C&I standards or terms indicated increased tolerance for risk was an important reason for the easing.

Modest net fractions of banks reported having experienced stronger demand for C&I loans from firms of all sizes. Banks reporting stronger loan demand most often cited as reasons increases in customers' need to finance mergers or acquisitions or to fund investment in plant or equipment, inventories, and accounts receivable. About half of banks experiencing stronger demand also cited shifts in customer borrowing to their bank from other bank or nonbank sources because those sources became less attractive.

Almost all foreign banks reported that they had kept their C&I lending standards basically unchanged over the past three months, except for two respondents, which reported having eased standards somewhat. However, on balance, foreign banks generally reported that they had eased terms on such loans. A moderate net fraction of the foreign banks indicated that demand for C&I loans had strengthened over the past three months.

Special questions on leveraged lending. The January survey contained a set of special questions about the reaction of banks to supervisory guidance on leveraged lending issued on March 21, 2013.

In response to, or in anticipation of, the supervisory guidance, a number of large domestic and foreign survey respondents tightened standards on such loans, and no bank reported having eased standards. On net, a moderate fraction of large domestic banks and a modest fraction of foreign banks increased maximum debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) restrictions. Almost all large domestic and foreign banks indicated that the fraction of C&I loans on their books they considered to be leveraged loans was less than 20 percent. In addition, all but two large domestic banks judged that 20 percent or less of leveraged loans that typically had been underwritten or participated in by their bank had been or would be curtailed or significantly altered by the supervisory guidance, and all but one foreign bank said that 10 percent or less of their leveraged loans would be similarly affected. Nevertheless, moderate net fractions of large domestic banks reported that the guidance was resulting in somewhat decreased dollar volumes on all of the broad categories of loans that were queried in the survey, such as by borrowers' use of funds or by firm size. About 40 percent of foreign institutions reported that the guidance was resulting in somewhat decreased dollar volumes for borrowing for leveraged buyout purposes or capital distributions. A somewhat smaller fraction of foreign banks reported decreased dollar volumes for mergers and acquisition purposes. On net, a moderate fraction of foreign institutions reported that the guidance was resulting in a decrease in the dollar value of leveraged loans to middle-market firms, and only a few such institutions indicated any change in leveraged loans to large firms. A majority of both large domestic and foreign respondents believed that it was at least somewhat likely that affected borrowers would be able to turn to other sources of funding.

Questions on commercial real estate lending. Starting with the October 2013 survey, the questions regarding CRE loans at domestic banks were asked separately for the three major CRE loan categories--construction and land development loans, loans secured by nonfarm nonresidential structures, and loans secured by multifamily residential structures. Small net fractions of domestic banks reported that they had eased standards on each of the three categories of CRE loans. Moderate net fractions of banks also indicated that they had experienced stronger demand for all subcategories of CRE loans.

Modest fractions of foreign banks reported having eased their lending standards on their combined portfolio of CRE loans, on balance, and a large net fraction of foreign respondents reported having experienced stronger demand for such loans over the past three months.

Lending to Households
(Table 1, questions 18-31)

Questions on residential real estate lending. A small net fraction of large banks reported that they had eased standards on prime residential mortgages over the past three months, while a modest net fraction of small banks indicated that they had tightened standards on such loans. On balance, a small number of banks reported having tightened standards on nontraditional residential mortgages. Banks reported having experienced weaker demand for prime and nontraditional mortgages on balance. Few banks reported having changed their standards on HELOCs, and on net, respondents indicated that they had experience little change in demand for such loans.

Questions on consumer lending. A modest fraction of domestic banks, on balance, indicated that they were more willing to make consumer installment loans as compared with the previous quarter. Very few banks reported having changed their standards for approving applications for credit cards, and a modest net fraction of banks reported having eased their standards for auto loans. Most terms on credit cards were little changed except for credit limits, which a modest net fraction of banks reported having eased. A modest fraction of banks, on balance, reported having reduced the loan rate spreads on auto loans. Most banks reported that they had kept their standards and terms on other consumer loans unchanged.

Only modest fractions of banks, on net, reported having experienced an increase in demand for auto loans, credit card loans, and other consumer loans over the past three months.

Special questions on banks' outlook for loan performance in 2014
(Table 1, questions 32-35; Table 2, questions 14-15)

The January survey contained a set of special questions on respondents' expectations for loan performance in 2014, assuming that economic activity progresses in line with consensus forecasts (these questions have been repeated annually, with some changes in loan categories, since 2006). Overall, modest to large fractions of domestic banks, on net, expected improvements in delinquency and charge-off rates during 2014 for most loan categories included in the survey, with the notable exception of subprime auto loans.

Regarding the outlook for the performance of business loans, about 20 to 40 percent of domestic banks, on net, reported that they expect delinquency and charge-off rates on most types of C&I loans to firms of all sizes to decline in 2014, except for syndicated leveraged loans, for which respondents expect little change in performance. These responses indicate that expectations of improvement in the quality of C&I loans are somewhat less widespread than in the 2013 survey, which is largely consistent with the already low delinquency and charge-off rates on such loans by historical standards. About half of domestic banks indicated that they expect delinquency and charge-off rates on construction and land development loans to decline in 2014, with smaller fractions expecting improvements in performance for the other major categories of CRE lending--loans secured by nonfarm nonresidential properties or by multifamily residential properties. Foreign respondents reported anticipating little improvement in the performance of C&I loans to large and middle-market firms this year. Regarding CRE loans, about one-third of foreign respondents forecast improvement in the performance of those secured by nonfarm nonresidential properties, and a similar fraction expected little change in the performance of other types of such loans.

About 40 percent of domestic banks, on net, expect the delinquency and charge-off rates on prime and nontraditional residential real estate loans to improve in 2014, up somewhat from the fractions reported in last year's survey. About one-third of respondents expect improvements in the credit quality of HELOCs.

On balance, about 15 to 20 percent of banks indicated that they expect improvement in loan performance for credit card loans, auto loans to prime borrowers, and other consumer loans. However, the majority of the 12 banks answering the special question on the outlook for the performance of subprime auto loans reported that they anticipate some deterioration in delinquency and charge-off rates on such loans.

1. Respondent banks received the survey on or after December 30, 2013, and responses were due by January 14, 2014. Return to text

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

3. The survey asks respondents separately about their standards for and demand from large and middle-market firms, which are generally defined as firms with annual sales of $50 million or more, and small firms, those with annual sales of less than $50 million. Return to text

This document was prepared by John C. Driscoll, with the assistance of Michael Massare, Jane Brittingham, Nathan Lloyd, Amanda Ng, and Shaily Patel, Division of Monetary Affairs, Board of Governors of the Federal Reserve System.