FRB: Senior Loan Officer Opinion Survey: July 2009

July 2009

The July 2009 Senior Loan Officer Opinion Survey
on Bank Lending Practices

The July 2009 Senior Loan Officer Opinion Survey on Bank Lending Practices addressed changes in the supply of, and demand for, loans to businesses and households over the past three months. The survey also included two sets of special questions: The first set asked banks to rank the causes of declines this year in commercial and industrial (C&I) lending, and the second set asked banks about their expectations for lending standards going forward relative to the average level over the past decade. The results reported here are based on responses from 55 domestic banks and 23 U.S. branches and agencies of foreign banks.¹

In the July survey, domestic banks indicated that they continued to tighten standards and terms over the past three months on all major types of loans to businesses and households, although the net percentages of banks that tightened declined compared with the April survey.² Demand for loans continued to weaken across all major categories except for prime residential mortgages. The fractions of domestic banks reporting additional weakening in demand in this survey were slightly lower than those in the April survey for C&I loans and home equity lines of credit, approximately the same for commercial real estate (CRE) and nontraditional residential mortgages, and slightly higher for consumer loans.

In response to a special question, domestic banks pointed to decreased loan demand and deteriorating credit quality as the most important reasons for declines in C&I lending this year. In response to a second special question, most banks reported that they expected their lending standards across all loan categories would remain tighter than their average levels over the past decade until at least the second half of 2010; for below-investment-grade firms and nonprime households, the expected timing is later, with many banks reporting that standards for such borrowers will remain tighter than average for the foreseeable future.

Lending to Businesses
(Table 1, questions 1-9; Table 2, questions 1-9)

Questions on commercial and industrial lending. About 30 percent of domestic respondents, on net, reported tightening standards on C&I loans to large firms over the past three months. That percentage is roughly 10 percentage points lower than in the April survey, continuing the declining trend that began after the measure reached a peak of roughly 85 percent in the November 2008 survey. Standards on C&I loans to small firms were reported as having been tightened by a net fraction of about 35 percent of domestic respondents, down from more than 40 percent in April and from 70 percent in January.

Tightening of the various terms on C&I loans by domestic respondents continued, but in general, the net fractions that reported tightening continued to fall from their late-2008 highs. Approximately 60 percent, on net, reported increasing spreads of loan rates for large firms, compared with 80 percent in April. For small firms, about 65 percent reported increasing spreads, compared with 75 percent in April. These movements contrast with the narrowing in corporate bond spreads over the same period. Significant net fractions of respondents continued to report tightening of other price terms on loans to firms of all sizes; in particular, the costs of credit lines and the premiums charged on riskier loans were reported as having been tightened by net fractions in excess of 50 percent of respondents.

U.S. branches and agencies of foreign banks also reported tightening their business lending stance further over the past three months. For C&I lending, the net percentage that reported having done so was again lower than in the previous survey. About 15 percent of foreign banks, on net, reported tightening credit standards for C&I loans, compared with 30 percent in April and 65 percent in January. Regarding lending terms, about 30 percent of foreign banks, on net, reported increasing the costs of credit lines, compared with 65 percent in April. The net percentage of foreign respondents that reported increasing premiums on riskier loans was 30 percent, down from 70 percent in April. In addition, about 15 percent of foreign banks reported increasing spreads of loan rates over their cost of funds, down from about 60 percent in April.

The predominant reasons that banks gave for tightening credit standards or terms for C&I loans resembled those reported in the previous two surveys. Both domestic and foreign respondents nearly unanimously cited a less favorable or more uncertain economic outlook, and large majorities cited a reduced tolerance for risk. Domestic respondents also widely noted a worsening of industry-specific problems, while foreign respondents were more likely to cite an increase in defaults by borrowers in public debt markets, as well as deterioration in their banks' current or expected capital positions. The net fraction of foreign banks reporting decreased liquidity in the secondary market for C&I loans fell substantially, to 30 percent from about 70 percent in the April survey.

Considerable net fractions of domestic respondents again reported weaker demand for C&I loans from firms of all sizes. About 45 percent of domestic respondents reported weaker demand for C&I loans from large firms, on net, and 55 percent indicated weaker demand from small firms; these figures are somewhat lower than the April figures of 60 and 65 percent for large and small firms, respectively. About one-fourth of reporting foreign banks, on net, indicated weaker demand for C&I loans, in contrast to the April survey, in which these banks reported that demand was about unchanged, on net.

Foreign and domestic respondents that reported weaker demand unanimously cited their customers' decreased financing needs for investment in plant or equipment as a reason for weaker demand for C&I loans over the past three months. The other predominant reasons for weaker demand included decreased needs to finance inventories, accounts receivable, and mergers or acquisitions. On net, about 25 percent of domestic banks reported that inquiries from potential business borrowers had declined during the survey period, a slightly smaller percentage than was reported in April. A little more than 15 percent of foreign banks reported a decline in such inquiries, a higher fraction than in the April survey.

Special question on commercial and industrial lending. The July survey included a special question on C&I lending. To gather information about the effects of changes in supply and demand in the market for C&I loans, the survey asked banks to rank the relative importance of five potential sources of the decline in C&I lending this year. According to domestic banks, the most important factor, on average, was lower loan demand from creditworthy borrowers because their funding needs had declined, followed by a deterioration in the credit quality of potential borrowers. Foreign banks, in contrast, ranked lower loan demand due to reduced funding needs third and listed deteriorating credit quality as the most important reason, followed by tighter bank lending standards. Despite strong corporate bond issuance over the past few months and improved functioning in the commercial paper market, both domestic and foreign banks indicated that one of the two least important factors (among those listed on the survey) was the ability of borrowers to tap other sources of funding. Respondents also indicated that higher loan spreads and fees were relatively unimportant.

Questions on commercial real estate lending. The fraction of domestic respondents that reported tightening standards on CRE loans fell to about 45 percent, compared with 65 percent in April. Still, this fraction is higher than that reported for C&I loans and all consumer lending categories except nontraditional residential mortgages. About 45 percent of foreign banks also reported tightening standards on CRE loans, a slight increase from the figure reported in April. The net percentage of domestic respondents that reported weaker demand for CRE loans fell slightly--to roughly 65 percent--but it remained large by historical standards and relative to other loan categories. About 45 percent of foreign respondents also reported weaker demand, a slight increase from the April survey.

Lending to Households
(Table 1, questions 10-19)

Questions on residential real estate lending. After holding nearly flat in the April survey, the net percentage of domestic banks that tightened standards on prime residential real estate loans fell to roughly 20 percent. This measure peaked at a level of about 75 percent one year ago. For the second consecutive survey, domestic banks reported increased demand from prime borrowers for residential mortgages; however, the net fraction fell to 15 percent from 35 percent in April. The net fraction of respondents that tightened standards on nontraditional residential mortgages fell to roughly 45 percent, from 65 percent in April. The net fraction that reported weaker demand for such mortgages was little changed at around 15 percent.

The net fraction of domestic banks that reported tightening their lending standards on home equity lines of credit fell to roughly 30 percent, from 50 percent in the April survey; and the fraction of banks reporting weaker demand for home equity lines of credit decreased to about 15 percent, from 30 percent in the April survey.

Questions on consumer lending. For the second consecutive survey, domestic banks reported little change in their willingness to make consumer installment loans. The net fraction of domestic banks that reported tightening credit card lending standards fell significantly from nearly 60 percent to around 35 percent. Similarly, the net fraction of domestic banks that reported tighter standards on consumer loans other than credit cards declined to 35 percent, from 45 percent in April. For both credit card and other consumer loans, domestic banks continued to report tightening of loan terms and conditions, although the net fractions of banks that tightened were not as high as in April. The net fraction of domestic banks reporting weaker demand for all types of consumer loans rose a few percentage points, to about 20 percent.

Questions on Existing Credit Lines
(Table 1, question 20; Table 2, question 10)

As in the April survey, significant net fractions of respondents reported decreasing the sizes of credit lines for existing customers on all types of business and consumer accounts surveyed. Nevertheless, these net percentages edged down for all categories of credit lines.

Special Questions on the Levels of Lending Standards
(Table 1, question 21; Table 2, question 11)

A set of special questions asked domestic banks about the levels of their current lending standards relative to their average levels over the past decade (the levels are referred to below as longer-term averages) and about their expectations for these relative levels in the future. Most of the recurring survey questions ask banks about changes in the levels of their lending standards over the past three months rather than about the levels of their lending standards. Because recent survey responses have indicated a widespread tightening of standards, these special questions were intended to elicit information about whether banks have responded to the current economic downturn by increasing the levels of their lending standards above longer-term averages and, if so, whether the elevated levels of standards are expected to persist for some time.

For C&I loans to investment-grade firms, 55 percent of the respondents reported that their standards were tighter than longer-term average levels but were expected to return to average levels by the end of 2011 or earlier. In addition, 25 percent of respondents indicated that standards on investment-grade C&I loans were not tighter than longer-term averages. Around 20 percent of respondents indicated that they expected C&I lending standards for both investment-grade and non-investment-grade C&I loans to remain tighter than their longer-term average levels for the foreseeable future.

With respect to CRE lending standards, nearly all banks indicated that current standards were tighter than their longer-term average levels. Around 40 percent expected standards to return to longer-term average levels by the second half of 2010 or in 2011 for both investment-grade and non-investment-grade lending. However, 40 percent indicated that standards for investment-grade CRE lending would remain tighter than their longer-term average levels for the foreseeable future, and about 55 percent expected this outcome for non-investment-grade CRE loans.

For prime and nonprime residential real estate lending (including home equity lines of credit), roughly 90 percent of respondents reported that lending standards were currently tighter than longer-term average levels. Of the respondents that reported that standards were currently tighter than longer-term average levels for prime residential real estate lending, about one-half expected standards to return to average levels by the end of 2011, with most expecting a return by the second half of 2010. The fraction that indicated standards would remain tighter than their longer-term average levels for the foreseeable future was slightly more than 40 percent. The comparable measure for nonprime standards was about 60 percent.

With respect to prime credit card borrowers, roughly one-third of respondents expected standards to remain tighter than their longer-term average levels for the foreseeable future, whereas one-fourth expected a return to longer-term average levels in 2011, and one-fourth expected a return earlier than 2011. Lending standards for nonprime credit card borrowers were expected to remain tight for a longer period, with two-thirds of respondents not expecting a return to longer-term average levels for the foreseeable future.

When asked about expected lending standards for other consumer loans, 25 percent of respondents reported that standards for such loans to prime borrowers were not tighter than longer-term average levels, and about 20 percent reported the same for nonprime borrowers. Another 50 percent of respondents indicated that standards for other consumer loans to prime borrowers were tighter than longer-term average levels but would return to such levels by the end of 2011 or earlier, and another 25 percent said the same applied to such loans to nonprime borrowers.

¹Respondent banks received the survey on or after July 14, 2009, and their responses were due on July 28, 2009. Return to text

²For questions about lending standards, 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 about demand, reported net percentages 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

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