FRB: Senior Loan Officer Opinion Survey: January 2012

January 2012

The January 2012 Senior Loan Officer Opinion Survey on Bank Lending Practices

The January 2012 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 lending to firms with European exposures; the second set asked banks about changes in their lending policies on commercial real estate (CRE) loans over the past year; and the third set asked banks about their outlook for credit quality in 2012. This summary is based on responses from 56 domestic banks and 23 U.S. branches and agencies of foreign banks.¹

Overall, in the January survey, domestic banks reported that their lending standards had changed little and that they had experienced somewhat stronger loan demand, on net, over the past three months. Foreign respondents, which mainly lend to businesses, reported a net tightening of their lending standards while loan demand was about unchanged.²

Regarding business loans, domestic banks reported, on balance, little change in standards on commercial and industrial (C&I) loans but a continued easing of pricing terms on such loans during the fourth quarter. Domestic banks reportedly experienced stronger demand for C&I loans from firms of all sizes on net. The net fraction of banks reporting increased demand from small firms rose to its highest level since 2005.³ Foreign respondents reported having tightened both standards and terms on C&I loans, on net, and they indicated that loan demand had been about unchanged over the past three months. Domestic banks continued to report little change in their standards for CRE loans, but modest net fractions had eased some loan terms over the past year. Moderate net fractions of domestic banks reported that demand for CRE loans had strengthened in the fourth quarter. Modest net fractions of foreign respondents reported having tightened standards for CRE loans. Foreign respondents also reported, on balance, little change in demand for such loans.

On the household side, lending standards and demand for loans to purchase residential real estate were reportedly little changed over the fourth quarter on net. Standards on home equity lines of credit (HELOCs) were about unchanged, while demand for such loans weakened on balance. Moderate net fractions of banks reported that they had eased standards on all types of consumer loans over the past three months, and some banks also eased terms on auto loans. Demand for credit card and auto loans reportedly had increased somewhat, while demand for other types of consumer loans was about unchanged.

Business Lending
(Table 1, questions 1-13; Table 2, questions 1-12)

Questions on commercial and industrial lending. Domestic banks reported that their credit standards on C&I loans to firms of all sizes were little changed over the fourth quarter on net. In contrast, U.S. branches and agencies of foreign banks reportedly tightened their standards on C&I loans for the second consecutive quarter on balance.

A large net fraction of domestic banks reportedly eased pricing terms on C&I loans to firms of all sizes over the past three months. A moderate net fraction of banks also indicated a reduction in their use of interest rate floors. Domestic banks that reported having eased terms on C&I loans unanimously cited increased competition from other banks and nonbank lenders as a reason for having done so. The handful of banks that reported having tightened standards or at least one C&I loan term primarily cited a less favorable or more uncertain economic outlook and increased concerns about legislative, supervisory, or accounting policies.

Meanwhile, foreign survey respondents reported that they continued to tighten terms on C&I loans on net. Moderate net fractions of foreign respondents reduced the maximum size of credit lines, increased the cost of such credit lines, and reduced the maximum maturity of C&I loans. Foreign respondents that reported having tightened their standards or terms on C&I loans unanimously cited a less favorable or more uncertain economic outlook, and 80 percent cited a deterioration in their current or expected liquidity position.

Reports from domestic banks of stronger demand for C&I loans outnumbered reports of weaker demand, in contrast to the net weakening of loan demand reported in the previous survey. About 15 percent of domestic banks, on net, reported increased demand for C&I loans from small firms, the largest net percentage that has been reported since 2005. Similarly, domestic banks reported a net increase in the number of inquiries from potential business borrowers regarding new or increased credit lines. Domestic banks that saw weaker demand for C&I loans and those that saw stronger demand both cited changes in customers’ funding needs related to inventories, accounts receivable, and mergers and acquisitions as important factors underlying the change in demand. Of domestic banks reporting weaker loan demand, about 85 percent cited customers’ reduced funding needs for capital investment. Foreign respondents experienced little change, on net, in demand for C&I loans.

Special questions on lending to firms with European exposures. A set of special questions in the January survey asked respondents about lending to banks headquartered in Europe and their affiliates and subsidiaries (regardless of the location of the affiliates and subsidiaries) as well as to nonfinancial firms that have operations in the United States and significant exposures to European economies (regardless of the location of the firms). These questions were also asked in the previous survey, conducted in October 2011. An additional special question asked domestic banks if they had experienced increased business because of reduced competition from European banks.

Large fractions of domestic and foreign respondents again reported having tightened standards on loans to European banks or their affiliates and subsidiaries. There was more widespread tightening of standards than in the previous survey on loans to nonfinancial firms that have operations in the United States and significant exposures to European economies. Demand for credit was reportedly little changed, on net, from European banks (or their affiliates and subsidiaries) and from nonfinancial firms with significant European exposures.

A new special question asked if domestic respondents had experienced an increase in business over the past six months as a result of decreased competition from European banks (or their affiliates and subsidiaries). About half of the respondents who reported competing with European banks noted such an increase in business.

Questions on commercial real estate lending. Domestic banks continued to report little change in their standards on CRE loans. A moderate net fraction of foreign survey respondents reportedly tightened their standards on such loans. Moderate fractions of domestic banks reported that demand for CRE loans had strengthened, on net, over the past three months. In contrast, the foreign respondents reported that demand for CRE loans was little changed over that period.

Special question on commercial real estate lending. The January survey also included a question regarding changes in terms on CRE loans over the past year (repeated annually since 2001). During the past 12 months, on net, some domestic banks reportedly eased maximum CRE loan sizes and many domestic banks trimmed loan rate spreads. A few large domestic banks, on balance, reported that they had lengthened maximum loan maturities.⁴ Other terms for CRE loans were reportedly little changed. The January results were the first in five years to find a net easing in some of the CRE loan terms covered in the survey.

Foreign respondents reported having tightened some terms and eased others on CRE loans over the past year. On balance, about 15 percent of foreign respondents reported that they had tightened debt service coverage ratios, but about 15 percent reported that they had increased maximum loan sizes. Other terms for CRE loans were reportedly little changed on balance.

Lending to Households
(Table 1, questions 14-27)

Questions on residential real estate lending. Most banks reported that lending standards for, and demand from, prime borrowers for residential real estate loans to purchase homes were little changed over the past three months. In addition, most banks continued to report little change in their lending standards for HELOCs, a pattern seen since the beginning of 2011. Meanwhile, the demand for such loans continued to weaken on net.

Questions on consumer lending. As in the previous three surveys, small fractions of domestic banks reported having eased standards on credit card, auto, and other consumer loans. Modest net fractions of banks continued to report having narrowed loan rate spreads and lengthened maximum maturities on auto loans. However, other terms across the categories of consumer loans were little changed on net.

A few banks, on balance, reported stronger demand for auto loans, with such reports coming primarily from large banks. A few small banks reported stronger demand for credit card loans. Demand for other consumer loans was reportedly about unchanged.

Special questions on banks' outlook for asset quality in 2012.
(Table 1, questions 28-30; Table 2, questions 13-14)

The January survey contained 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. These questions have been asked once each year for the past six years. Overall, between 15 and 60 percent of domestic banks, on net, expected improvements in delinquency and charge-off rates during 2012 in the major loan categories included in the survey. Expectations for improvement in 2012 were less widespread than they were a year ago, but last year’s expectations were the highest in the history of the question.

In this year’s survey, banks were least likely to forecast improvement in the quality of consumer loans, likely in part because measures of consumer loan quality are already quite positive. About 20 percent of banks, on net, expected improvement in credit card loans, and a similar fraction projected improvement in other consumer loans.

Expectations for improvements this year in the asset quality of prime residential real estate loans and for HELOCs stayed roughly the same as last year, with a bit more than one-third of the respondents anticipating an improvement in the quality of such loans. More survey respondents expect the asset quality of nontraditional residential real estate loans to improve in 2012 than did last year. About 55 percent of banks, on net, anticipate that delinquency and charge-off rates on such nontraditional loans will decline this year compared with about 20 percent of the respondents to last year’s survey.

Regarding the outlook for the quality of business loans, about 50 percent of domestic banks, on net, expect a decline in the delinquency and charge-off rates on their C&I loans both to large and middle-market firms and to small firms. Smaller domestic respondents were more likely to expect improvements in C&I loan quality this year than their larger counterparts. About 60 percent of domestic banks indicated that they expect improvement in the quality of CRE loans this year. In contrast, foreign respondents, on net, anticipated no improvement in the quality of their C&I loans this year, and about 25 percent of these respondents forecast improvement in the quality of their CRE loans.

¹ Respondent banks received the survey on or after December 21, 2011, and responses were due by January 10, 2012. Return to text

²For questions that ask about lending standards or terms, reported net fractions equal the fraction of banks that reported having tightened standards ("tightened considerably" or "tightened somewhat") minus the fraction of banks that reported having eased standards ("eased considerably" or "eased somewhat"). For questions that ask about 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 suggests that respondents define large and middle-market firms 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

⁴Large banks are defined as banks with assets greater than or equal to $20 billion as of September 30, 2011, and other banks as those with assets of less than $20 billion. Return to text

This document was prepared by Cindy Vojtech with the assistance of Sam Levine, Division of Monetary Affairs, Board of Governors of the Federal Reserve System.