FRB: Senior Loan Officer Opinion Survey: January 2011

January 2011

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

The January 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. The survey included three sets of special questions: the first set asked banks about changes in their credit policies on commercial real estate (CRE) loans over the past year; the second set asked banks about factors affecting recent growth in closed-end residential real estate loans; and the third set asked banks about their outlook for credit quality in 2011. This summary is based on responses from 57 domestic banks and 22 U.S. branches and agencies of foreign banks.¹

Overall, the January survey indicated that a modest net fraction of banks continued to ease standards and terms for commercial and industrial (C&I) loans over the fourth quarter while banks reported small mixed changes in their lending policies for other types of loans to businesses and households.² Similarly, the respondents reported a moderate increase in demand for C&I loans but little change, on balance, in demand for other types of loans.

Regarding loans to businesses, survey respondents, particularly large banks, reported having eased standards and most terms on C&I loans, especially to large and middle-market firms.³ Banks mainly pointed to a more favorable or less uncertain economic outlook and increased competition from other banks or nonbank lenders as reasons for easing. By contrast, standards on CRE loans were reportedly about unchanged.

Changes in standards and terms on loans to households were small and mixed. Banks again reported an increased willingness to make consumer installment loans, and a small net fraction of respondents reported easing standards for approving consumer credit card applications. However, a few banks, on net, reported having tightened terms on, or having reduced the sizes of credit lines on existing consumer credit card accounts. A modest net fraction of respondents reported having tightened standards on nontraditional residential mortgage loans, while banks on net reported little change in standards on prime residential mortgage loans or home equity lines of credit (HELOCs).

Demand increased, on net, for business loans, including C&I loans, particularly for large or middle-market firms. A smaller net fraction of banks reported increased demand for CRE loans. Moderate net fractions of banks reported decreased demand for all types of residential mortgage loans. In addition, banks, on net, did not indicate much change in demand for consumer loans.

Business Lending
(Table 1, questions 1-9, 22; Table 2, questions 1-10)

Questions on commercial and industrial loans. The January survey found that a modest net fraction of domestic respondents continued to ease standards on C&I loans to large and middle-market firms. Few banks reported changing standards on such loans to small firms. The banks that eased standards were almost all large banks. In addition, a few branches and agencies of foreign banks reported having eased standards on C&I loans, while none of those institutions tightened standards.

Positive net fractions of banks eased most terms on C&I loans, with larger net fractions easing terms for loans to large and middle-market firms than for loans to small firms. Compared with the October survey, somewhat more banks reported having reduced spreads of loan rates over their bank's cost of funds, with about 45 percent of banks, on net, trimming spreads on loans to large and middle-market firms and 30 percent, on net, narrowing spreads on loans to small firms. Somewhat smaller net fractions of banks lowered the cost of credit lines and lengthened the maximum maturity for loans to firms of all sizes. The sizes of existing C&I credit lines and business credit card accounts were reportedly little changed.

Of banks that reported having eased standards or terms on C&I loans, large majorities pointed to increased competition from other banks and nonbank lenders, as well as to a more favorable or less uncertain economic outlook, as reasons for the changes. Between 20 percent and 30 percent of respondents also cited reductions in defaults by borrowers in the public debt market, increased tolerance for risk, and industry-specific improvements.

Reports of strengthened demand for C&I loans were more widespread than in the previous survey. About 30 percent of banks, on net, reported greater demand from large and middle-market firms, and about 5 percent reported strengthened demand from small firms. In addition, compared with the October survey, a larger fraction of banks reported an increase in inquiries from business borrowers for new or increased credit lines. Of the banks reporting stronger demand, about 75 percent indicated that the increased demand was partly due to funding needs for merger and acquisition activity, and more than half noted reduced borrowing from other banks or nonbank sources. Somewhat less than half of the banks also noted increased financing needs for inventories, accounts receivable, and investment in plant and equipment. Foreign institutions also reported a moderate net increase in demand and in inquiries regarding lines of credit, in line with the previous survey.

Questions on commercial real estate lending. Domestic respondents reported no net change in standards on CRE loans in the fourth quarter, though a few foreign institutions reported having tightened standards. Roughly 20 percent of banks, on net, indicated that they had reduced the sizes of lines of credit for commercial construction, about the same as in the previous survey. About 10 percent of domestic banks, on net, reported increased demand for CRE loans, the strongest reading since early 2006. Foreign banks also reported that demand had strengthened, on net.

Special question on commercial real estate lending. In response to a special question that has been repeated on an annual basis since 2001, domestic banks indicated that they had tightened some terms on CRE loans over 2010. However, the tightening was less widespread than that reported in 2009, and almost no banks reported having tightened terms considerably. About 40 percent of domestic banks, on net, reported having tightened loan-to-value ratios, and moderately smaller fractions tightened debt service coverage ratios and maximum loan sizes. Spreads, maximum maturities, and requirements for takeout financing were reportedly little changed on net. Moderate net fractions of foreign banks indicated that they had eased some terms, including maximum loan sizes, spreads, and requirements on debt-service coverage ratios.

Lending to Households
(Table 1, questions 10-21)

Questions on residential real estate lending. Standards on prime closed-end residential real estate loans were little changed, on balance, over the fourth quarter. In contrast, standards on nontraditional mortgage loans were reportedly tightened by about 15 percent of banks. The net fraction of banks tightening standards on nontraditional mortgage loans has now increased a bit for two consecutive quarters, after having fallen to nearly zero during the first half of 2010. Banks reported little net change in standards for, or the sizes of, HELOCs.

Demand reportedly weakened somewhat, on net, for both prime and nontraditional closed-end residential real estate loans as well as for HELOCs. Reported demand for closed-end loans has now declined for two consecutive surveys after having increased during parts of 2009 and 2010.

Special questions on factors affecting recent closed-end residential real estate loan growth. According to the Federal Reserve's weekly H.8 statistical release, "Assets and Liabilities of Commercial Banks in the United States," banks' aggregate holdings of closed-end residential real estate loans increased steadily over the second half of 2010.⁴ A special survey question asked respondents to assess the contribution of various possible factors to the recent increase in their closed-end residential real estate loan holdings.

About 45 percent of the respondents indicated that they had experienced recent growth in their residential mortgage portfolios. The majority of banks that recorded such an increase noted the relative attractiveness of the risk-adjusted returns on these loans compared with other assets and reported having become more willing to expand their overall balance sheets via this category of loan. About one-third of the banks also reported having originated a larger volume of loans that are not eligible for guarantee by the Federal Housing Administration or do not conform to standards required for sale to the government sponsored enterprises (GSEs), Federal National Mortgage Association and Federal Home Loan Mortgage Corporation. Banks were somewhat less likely to credit their accumulations of closed-end residential mortgages to reductions in charge-offs or paydowns, or to originations of GSE-eligible loans that had exceeded their banks' capacity to process such loans for sale to the GSEs. Only two banks attributed their loan accumulations in part to repurchases from the GSEs or other securitization pools.

An additional special question asked respondents whether they expected their holdings of closed-end residential real estate loans to increase over the first half of 2011. About 35 percent of banks, on net, reported expectations that such loan holdings would increase.

Questions on consumer lending. A small net fraction of banks reported having eased standards on consumer credit card and non-credit-card loans in the fourth quarter, about the same as in the past two surveys. The net fraction of banks that reported an increased willingness to make consumer installment loans remained elevated.

Banks reported little change, on net, in most terms on consumer loans, with the exception of spreads on non-credit-card loans and minimum credit scores on credit card loans, which were eased by small net fractions of banks. A similar fraction of banks reported cutting back the sizes of consumer credit card lines. Banks were somewhat split regarding changes in demand for consumer loans, and on net they reported little change.

Special questions on banks' outlook for asset quality in 2011.
(Table 1,questions 23-25)

The January survey included a set of special questions that asked banks about their outlook for delinquencies and charge-offs across major loan categories in the current year, assuming that economic activity progresses in line with consensus forecasts. This special question has been asked once each year during the past five years. In the January survey, expectations were significantly more upbeat than in past years. Moderate to large net fractions of banks reported that they expected improvements in delinquency and charge-off rates during 2011 in every major loan category.

The responses indicated that banks were least likely to expect improvement in the quality of residential real estate loans this year. About 20 percent of banks, on net, reportedly expect improvement in nontraditional closed-end loans, and about 35 percent of banks indicated they expect improvement in HELOCs. Almost 40 percent of respondents expected improvement for prime closed-end loans. Large banks were somewhat more likely than small banks to report expectations of improvement in the quality of residential real estate loans.

The survey also found that about 50 percent of banks, on net, expected improvement this year in the quality of consumer loans, including both credit card loans and other consumer loans. Similarly, about 55 percent of banks, particularly large banks, expected improvement in the quality of CRE loans.

A large share of respondents reported that they expect an improvement this year in the quality of C&I loans. About 80 percent of respondents expected improvements in C&I loans to large and middle-market firms, and about 70 percent expected improvements in C&I loans to small firms. Moreover, about 10 percent expected the quality of C&I loans to large and middle-market firms to improve "substantially" (as opposed to improve "somewhat") this year. In addition, under the assumption that economic activity progressed in line with consensus forecasts, no bank reported that they expect deterioration in the quality of C&I loans to firms of any size this year.

¹ Respondent banks received the survey on or after December 22, 2010, and their responses were due by January 11, 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 more than $50 million. Large banks are defined as banks with assets greater than or equal to $20 billion as of October 31, 2010. Return to text

⁴ The H.8 statistical release can be found at http://www.federalreserve.gov/releases/h8/current/default.htm. Return to text

This document was prepared by Jonathan D. Rose with the assistance of Bernard Rump and Thomas Spiller, Division of Monetary Affairs, Board of Governors of the Federal Reserve System.