July 2008
The July 2008 Senior Loan
Officer Opinion Survey
on Bank Lending Practices
Table 1 | Table 2 | Chart data
Table 1 (PDF) | Table 2 (PDF) | Charts (PDF)
The July 2008 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.1 The survey also included two sets of special questions: The first set queried domestic banks about securitizations with, or sales to, Fannie Mae and Freddie Mac of conforming-jumbo mortgage loans; the second set asked respondents how they expected credit standards on loans to businesses and households at their bank to change in the second half of 2008 and in the first half of 2009, assuming that economic activity progresses in line with consensus forecasts. This article is based on responses from 52 domestic banks and 21 U.S. branches and agencies of foreign banks.
In the current survey, large net fractions of domestic institutions reported having tightened their lending standards and terms on all major loan categories over the previous three months. In particular, the net fractions of banks that had tightened credit standards on consumer loans increased notably relative to the April survey. On net, considerable fractions of foreign institutions also had tightened their credit standards and terms on loans to businesses over the past three months, although these fractions were generally smaller than those reported in the April survey. Large net fractions of domestic and foreign respondents expected their banks to tighten credit standards on all major loan categories in the second half of this year, and smaller, though substantial, net fractions of respondents expected their banks to tighten standards in the first half of 2009. Finally, demand for loans from both businesses and households at domestic and foreign institutions reportedly weakened, on net, over the past three months.
Business Lending
(Table 1, questions 1-8; Table 2, questions 1-8)
Questions on commercial and industrial lending. About 60 percent of domestic banks—a slightly larger fraction than in the April survey—reported having tightened lending standards on commercial and industrial (C&I) loans to large and middle-market firms over the past three months. About 65 percent of those institutions—up notably from roughly 50 percent in the April survey—also indicated that they had tightened their lending standards on C&I loans to small firms over the same period. Significant majorities of domestic respondents indicated that they had tightened selected price terms on C&I loans to firms of all sizes: About 80 percent of banks—up from roughly 70 percent in the April survey—noted that they had increased spreads of loan rates over their cost of funds on C&I loans to large and middle-market firms, and about 70 percent of respondents—a somewhat higher fraction than in the April survey—reported having widened spreads on loans to small firms. In addition, considerable fractions of domestic respondents reported having boosted non-price-related lending terms on C&I loans to firms of all sizes over the survey period, and the fraction of banks that tightened such terms on loans to small firms increased significantly relative to the April survey.
About 35 percent of U.S. branches and agencies of foreign banks—down from about 60 percent in the April survey—indicated that they had tightened their lending standards on C&I loans over the past three months. Majorities of foreign respondents reported that they had tightened various price terms on such loans, although the fractions of those institutions that reported having tightened such terms over the previous three months were, on net, significantly smaller than in the April survey. For example, about 60 percent of foreign banks—down from about 80 percent in the April survey—reported having raised spreads of loan rates over their cost of funds over the past three months.
Very large majorities of domestic and foreign respondents pointed to a less favorable or more uncertain economic outlook, their bank’s reduced tolerance for risk, and the worsening of industry-specific problems as reasons for tightening their lending standards and terms on C&I loans over the past three months. Roughly 65 percent of foreign respondents—up from about 45 percent in the April survey—also noted that concerns about their bank’s current or expected capital position had contributed to the more-stringent lending policies over the past three months. In contrast, only about 25 percent of domestic respondents—down from about 35 percent in the April survey—reported having tightened their lending standards because of concerns about their bank’s current or expected capital position.
On balance, the July survey pointed to a further weakening of C&I loan demand over the past three months. On net, about 15 percent of small domestic and 25 percent of foreign banks reported weaker demand for C&I loans from firms of all sizes over the survey period. About 15 percent of large domestic banks, on net, experienced weaker demand from small firms, although about 5 percent of these banks, on balance, reported that demand for C&I loans from large and middle-market firms had increased over the past three months.
Substantial majorities of domestic institutions that experienced weaker loan demand over the past three months cited a decrease in customers’ needs to finance investment in plant or equipment as well as firms’ decreased need to finance inventories. In addition, about 65 percent of domestic and 70 percent of foreign respondents pointed to a decrease in customers’ needs for merger and acquisition financing as a reason for the lower demand for C&I loans. Regarding future business, small domestic and foreign institutions, on balance, reported that inquiries from potential business borrowers were about unchanged during the survey period. In contrast, about 15 percent of large domestic banks, on net, reported an increase in the number of inquiries from potential business borrowers over the past three months.
Questions on commercial real estate lending. About 80 percent of domestic banks—a fraction similar to that in the April survey—reported having tightened their lending standards on commercial real estate loans over the past three months. About 35 percent of foreign banks—down from roughly 55 percent in the April survey—also indicated that they had tightened their lending standards on commercial real estate loans. Regarding demand for these types of loans, about 30 percent of domestic banks and 45 percent of foreign institutions—fractions somewhat smaller than those in the April survey—reported weaker demand for commercial real estate loans over the survey period on net.
Lending to Households
(Table 1, questions 9-21)
Questions on residential real estate lending. Large majorities of domestic respondents reported having tightened their lending standards on prime, nontraditional, and subprime residential mortgages over the previous three months. About 75 percent of domestic respondents—up from about 60 percent in the previous survey—indicated that they had tightened their lending standards on prime mortgages.2 Of the 32 respondents that originated nontraditional residential mortgage loans, about 85 percent—up from about 75 percent in the April survey—reported having tightened their lending standards on such loans.3 Finally, 6 of the 7 respondents that originated subprime mortgage loans—a somewhat higher proportion than in the April survey—indicated that they had tightened their lending standards on those loans over the past three months.4
On net, about 30 percent of domestic respondents—a slightly higher fraction than in the April survey—experienced weaker demand for prime residential mortgage loans over the past three months, and about 45 percent—up from roughly 30 percent in the April survey—saw weaker demand for nontraditional mortgage loans over the same period. On balance, 2 of the 7 domestic banks that originated subprime mortgage loans reported weaker demand for subprime loans over the survey period—a proportion significantly smaller than in the April survey.
About 80 percent of domestic respondents—up from about 70 percent in the April survey—noted that they had tightened their lending standards for approving applications for revolving home equity lines of credit (HELOCs) over the past three months. Concerning demand for this product, about 10 percent of domestic banks, on net, reported weaker demand for HELOCs over the past three months, down from about 20 percent in the April survey.
Special questions on securitizations and sales of conforming-jumbo mortgage loans.5 About 30 percent of domestic respondents indicated that their bank had securitized with, or sold to, Fannie Mae and Freddie Mac (the government-sponsored enterprises, or GSEs) conforming-jumbo mortgage loans over the past three months, and about 45 percent of respondents expected their bank to do so over the next six months.6 As reasons for not securitizing or selling conforming-jumbo loans over the past three months or in the next six months, about 50 percent of respondents pointed to a lack of demand for conforming-jumbo loans at their bank, and about 45 percent cited the cost of the GSEs’ guarantee fees or other pricing terms. Finally, roughly 40 percent of respondents pointed to a limited number of mortgage applicants at their bank who meet the GSEs’ underwriting criteria.
Questions on consumer lending. About 65 percent of domestic banks—up notably from about 30 percent in the April survey—indicated that they had tightened their lending standards on credit card loans over the past three months, and about the same fraction of respondents—up from roughly 45 percent in the April survey—reported having tightened standards on consumer loans other than credit card loans. In addition, considerable fractions of respondents reported having increased minimum required credit scores on both types of consumer loans and reduced the extent to which such loans were granted to customers who did not meet their bank’s credit-scoring thresholds. Finally, large net fractions of banks noted that they had lowered credit limits on credit card accounts over the past three months, and increased interest rate spreads on consumer loans other than credit card loans. On balance, about 35 percent of domestic banks—up from roughly 25 percent in the April survey—expressed a diminished willingness to make consumer installment loans relative to three months earlier. Regarding loan demand, about 30 percent of respondents, on net, indicated that they had experienced weaker demand for consumer loans of all types over the past three months, up from about 20 percent in the April survey.
Special questions on the outlook for credit standards
(Table 1, question 22-23; Table 2, question 9)
A final set of special questions in the July survey queried respondents about their outlook for changes in credit standards at their banks on loans to businesses and households in the second half of 2008 and in the first half of 2009, under the assumption that economic activity progresses in line with consensus forecasts. Responses to these questions suggested a gradual decline in the fractions of banks tightening lending standards over the next year, with only very few banks expecting to ease standards over that period.
Concerning loans to businesses, about 55 percent of domestic and 45 percent of foreign respondents indicated that they expected their banks to tighten credit standards on C&I loans in the second half of this year, and about 45 percent of domestic and 30 percent of foreign institutions, on net, anticipated tightening their lending standards on these loans in the first half of next year. Regarding commercial real estate loans, about 70 percent of domestic and 45 percent of foreign respondents believed that their institutions would tighten their lending standards on these loans in the second half of 2008, and roughly 50 percent of both domestic and foreign banks anticipated doing so in the first half of 2009.
On the household side, about 45 percent of domestic respondents noted that they expected their banks to tighten lending standards on prime residential mortgage loans in the second half of 2008, and about 30 percent, on balance, thought that they would tighten standards on those loans in the first half of 2009. Concerning nonprime mortgage loans—a category that includes both nontraditional and subprime mortgage loans—about 65 percent of the respondents that reported having originated such loans indicated that they anticipated tightening their lending standards in the second half of this year, and about 50 percent believed that they would do so in the first half of 2009. About 60 percent of domestic respondents, on net, reported that they expected to tighten their credit standards for approving applications for revolving HELOCs through the end of 2008, and roughly 40 percent of banks anticipated a tightening on these products in the first half of 2009. Regarding credit card loans, about 60 percent of domestic respondents indicated that they expected their banks to tighten standards on these loans in the second half of 2008, and about 35 percent, on balance, thought that their banks would tighten such standards on these loans in the first half of 2009. Finally, about 50 percent of respondents reported that they expected to tighten their lending standards on consumer loans other than credit cards through the end of 2008, and 30 percent, on net, indicated that they anticipated doing so in the first half of next year.
1Banks received the survey on or after July 10, and their responses were due on July 24. Return to text
2A total of 50 institutions reported that they had originated prime residential mortgages. According to the Call Reports, these 50 banks accounted for about 80 percent of residential real estate loans on the books of all commercial banks as of March 31, 2008. Return to text
3According to the Call Reports, these 32 institutions accounted for about 70 percent of residential real estate loans on the books of all commercial banks as of March 31, 2008. Return to text
4According to the Call Reports, these 7 institutions accounted for about 40 percent of residential real estate loans on the books of all commercial banks as of March 31, 2008. Return to text
5The Economic Stimulus Act of 2008 raised the conforming loan limit through the end of 2008 for a first mortgage on a single-family home in the contiguous United States from $417,000 to 125 percent of the median house price in certain high-cost areas, with an overall cap of $729,750. In the survey, conforming-jumbo mortgage loans were defined as those that do not conform under the previous loan-size limits but do under the new limits. For additional information about the maximum conforming loan limits that will be in effect through the end of 2008 see: www.ofheo.gov/newsroom.aspx?ID=418&q1=0&q2=0. Return to text
6A total of 16 banks reported having securitized with, or sold to, the GSEs conforming-jumbo loans over the past three months. According to the Call Reports, these 16 banks accounted for about 60 percent of residential real estate loans on the books of all commercial banks as of March 31, 2008. A total of 22 respondents expect their banks to securitize with, or sell to, the GSEs conforming-jumbo mortgage loans in the next six months. According to the Call Reports, these 22 banks accounted for about 70 percent of residential real estate loans on the books of all commercial banks as of March 31, 2008. Return to text
This document was prepared by David Lucca and Mary Beth Muething, Division of Monetary Affairs, Board of Governors of the Federal Reserve System.