Senior Loan Officer Opinion Survey on Bank Lending Practices
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The October 2022 Senior Loan Officer Opinion Survey on Bank Lending Practices
The October 2022 Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS) addressed changes in the standards and terms on, and demand for, bank loans to businesses and households over the past three months, which generally correspond to the third quarter of 2022.1
Regarding loans to businesses, survey respondents reported, on balance, tighter standards and weaker demand for commercial and industrial (C&I) loans to firms of all sizes over the third quarter.2 Meanwhile, banks reported tighter standards and weaker demand for all commercial real estate (CRE) loan categories.
For loans to households, lending standards tightened or remained basically unchanged across all categories of residential real estate (RRE) loans and demand weakened for all such loans. In addition, banks reported tighter standards and stronger demand for home equity lines of credit (HELOCs). Standards tightened for credit card loans and other consumer loans while standards for auto loans remained unchanged. Meanwhile, demand strengthened for credit card loans, was unchanged for other consumer loans, and weakened for auto loans. To better understand how consumer lending standards have changed conditional on borrower credit quality, the survey also included a set of special questions that asked banks to assess the likelihood of approving credit card and auto loan applications by borrower FICO score in comparison with the beginning of the year. Banks reported they were less likely to approve such loans for borrowers with FICO scores of 620 and 680 in comparison with the beginning of the year, while they were more likely and about as likely to approve credit card loan and auto loan applications, respectively, for borrowers with FICO scores of 720 over this same period.
The October SLOOS survey also included a set of special questions investigating banks’ assessments of the likelihood and severity of a recession any time during the next 12 months, and of the expected changes in banks’ lending standards should a recession occur. Most banks assigned a probability of greater than or equal to 40 percent that a recession would occur any time over the next 12 months. Most banks also indicated that, if a recession were to occur, they would expect it to be mild to moderate in severity. In general, banks reported expecting to tighten standards across all loan categories should a recession occur.
Lending to Businesses
(Table 1, questions 1–12; table 2, questions 1–8)
Questions on commercial and industrial lending. Over the third quarter, significant net shares of banks reported having tightened standards on C&I loans to firms of all sizes.3 Banks also reported having tightened most queried terms on C&I loans to firms of all sizes over the third quarter.4 Tightening was most widely reported for premiums charged on riskier loans, costs of credit lines, and spreads of loan rates over the cost of funds. In addition, significant net shares of banks reported having tightened loan covenants to large and middle-market firms, while moderate net shares of banks reported having tightened covenants to small firms.5 Similarly, a moderate net share of foreign banks reported having tightened standards for C&I loans.
Major net shares of banks that reported having tightened standards or terms cited a less favorable or more uncertain economic outlook, a reduced tolerance for risk, and the worsening of industry-specific problems as important reasons for doing so. Significant net shares of banks also cited decreased liquidity in the secondary market for C&I loans and less aggressive competition from other banks or nonbank lenders as important reasons for tightening lending standards and terms.
Regarding demand for C&I loans over the third quarter, a modest net share of banks reported weaker demand for loans from large and middle-market firms, and a significant net share of banks reported weaker demand from small firms. In addition, a moderate net share of banks reported a decrease in the number of inquiries from potential borrowers regarding the availability and terms of new credit lines or increases in existing lines. Similarly, a significant net share of foreign banks reported weaker demand for C&I loans over the third quarter.
Of the banks reporting weaker demand for C&I loans, major net shares cited decreased customer needs to finance inventory, decreased customer investment in plants or equipment, and decreased customer needs to finance mergers or acquisitions and accounts receivable as reasons for the weaker demand.6
Questions on commercial real estate lending. Over the third quarter, a major net share of banks reported having tightened standards for construction and land development loans as well as for nonfarm nonresidential loans, while a significant net share of banks reported having tightened standards for loans secured by multifamily properties. Meanwhile, significant net shares of banks reported weaker demand for all CRE loan categories. Furthermore, significant net shares of foreign banks reported tighter standards for CRE loans, on net, while major net shares of foreign banks reported weaker demand for such loans.
Lending to Households
(Table 1, questions 13–26)
Questions on residential real estate lending. Over the third quarter, lending standards tightened or remained basically unchanged across all RRE loan types and for HELOCs.7 Banks, on net, reported standards remained basically unchanged for the following types of mortgages: non-qualified mortgage (QM) non-jumbo; government; government-sponsored enterprise (GSE)-eligible; and QM non-jumbo, non-GSE-eligible. However, a moderate net share of banks tightened standards for subprime residential mortgages, while modest net shares of banks tightened standards for non-QM jumbo and QM jumbo residential mortgages, as well as for HELOCs.
Meanwhile, major net shares of banks reported weaker demand for all RRE loans over the third quarter, except for HELOCs, for which a moderate net share of banks reported stronger demand.
Questions on consumer lending. Over the third quarter, moderate net shares of banks reported tightening lending standards for credit card loans and other consumer loans, while standards for auto loans remained basically unchanged. Consistent with tightened standards for credit card loans, banks also reported tightening most queried terms on credit card loans. Specifically, moderate net shares of banks reported wider interest rate spreads on these loans and tightening the extent to which loans are granted to some customers that do not meet credit scoring thresholds.8 Banks reported, on net, leaving most terms on auto loans unchanged.9 For other consumer loans, modest net shares of banks reported tightening the extent to which loans are granted to borrowers not meeting credit score criteria, widening spreads over the cost of funds, and increasing the minimum required credit score. The remaining terms and conditions for other consumer loans remained basically unchanged.10
Regarding demand for consumer loans, a moderate net share of banks reported stronger demand for credit card loans, while a significant net share of banks reported weaker demand for auto loans. Meanwhile, demand for other consumer loans remained basically unchanged.
Special Questions on Banks’ Credit Card and Auto Lending Policies
(Table 1, questions 27–28)
In a set of special questions, banks were asked to assess the likelihood of approving credit card and auto loan applications by borrower FICO score in comparison with the beginning of the year. Significant net shares of banks reported that they were less likely to approve both credit card loan applications and auto loan applications from borrowers with FICO scores of 620. Moderate and modest net shares of banks reported that they were less likely to approve credit card loan applications and auto loan applications, respectively, from borrowers with FICO scores of 680. Meanwhile, a modest net share of banks reported they were more likely to approve credit card applications from borrowers with FICO scores of 720, while the likelihood of approving auto loan applications to borrowers with FICO scores of 720 was basically unchanged.
Special Questions on Recession Likelihood and Expected Changes in Standards
(Table 1, questions 29–31; table 2, questions 9–11)
In a set of special questions in the October SLOOS, banks were asked about their assessment of the likelihood and severity of a recession any time during the next 12 months and how they expected their lending standards to change should a recession occur.11 For these questions, banks were asked to consider the definition of a recession as set by the NBER’s Business Cycle Dating Committee: “A significant decline in economic activity that is spread across the economy and that lasts more than a few months.” In addition, banks were asked to consider the following categories for a recession: “severe,” “moderate,” and “mild,” as defined in Durdu et al. (2017).12
Most banks assigned probabilities between 40 and 80 percent to the likelihood of a recession in the next 12 months, with no bank reporting a probability less than 20 percent. Although banks in general assigned relatively high probabilities to a recession occurring in the next 12 months, most banks reported expecting the recession to be mild to moderate, should one occur. In addition, most foreign banks assigned a probability between 40 and 80 percent that a recession would occur in the next 12 months.
In this set of special questions, banks were also asked how their lending standards would change, should a recession occur any time in the next 12 months, for the five major loan categories: C&I, CRE, RRE, credit card, and auto loans. For all these loan categories, major net shares of banks reported lending standards would tighten. In addition, major net shares of foreign banks reported lending standards would tighten for C&I and CRE loans.13
This document was prepared by Andrew Castro, with the assistance of Ria Sonawane, Division of Monetary Affairs, Board of Governors of the Federal Reserve System.
1. Responses were received from 71 domestic banks and 18 U.S. branches and agencies of foreign banks. Respondent banks received the survey on September 26, 2022, and responses were due by October 7, 2022. Unless otherwise indicated, this summary refers to the responses of domestic banks. Return to text
2. Large and middle-market firms are defined as firms with annual sales of $50 million or more, and small firms are those with annual sales of less than $50 million. Large banks are defined as those with total domestic assets of $50 billion or more as of June 30, 2022. Return to text
3. For questions that ask about lending standards or terms, "net fraction" (or "net percent" or "net share") refers to 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, this term refers to 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"). For this summary, when standards, terms, or demand are said to have "remained basically unchanged," the net percentage of respondent banks that reported either tightening or easing of standards or terms, or stronger or weaker demand, is greater than or equal to 0 and less than or equal to 5 percent; "modest" refers to net percentages greater than 5 and less than or equal to 10 percent; "moderate" refers to net percentages greater than 10 and less than or equal to 20 percent; "significant" refers to net percentages greater than 20 and less than 50 percent; and "major" refers to net percentages greater than or equal to 50 percent. Return to text
4. Lending standards characterize banks’ policies for approving applications for a certain loan category. Conditional on approving loan applications, lending terms describe banks’ conditions included in loan contracts, such as those listed for C&I loans under question 2 to both domestic and foreign banks and those listed for credit card, auto, and other consumer loans under questions 21–23 to domestic banks. Thus, standards reflect the extensive margin of lending, while terms reflect the intensive margin of lending. The eight lending terms that banks are asked to consider with respect to C&I loans are the maximum size of credit lines, maximum maturity of loans or credit lines, costs of credit lines, spreads of loan rates over the cost of funds, premiums charged on riskier loans, loan covenants, collateralization requirements, and use of interest rate floors. Return to text
5. Modest to moderate net shares of banks reported tightening for the remaining terms: collateralization requirements, maximum size of credit lines, and use of interest rate floors. A modest net share of banks reported tightening the maximum maturity of loans or credit lines to small firms, while this term remained unchanged for large and middle-market firms. Return to text
6. Among respondents that reported stronger demand, major net shares of banks cited all available reasons including customer accounts receivable or inventory financing needs increased. Return to text
7. The seven categories of residential home-purchase loans that banks are asked to consider are GSE-eligible, government, QM non-jumbo non-GSE-eligible, QM jumbo, non-QM jumbo, non-QM non-jumbo, and subprime. See the survey results tables that follow this summary for a description of each of these loan categories. The definition of a QM was introduced in the 2013 Mortgage Rules under the Truth in Lending Act (12 C.F.R. pt. 1026.32, Regulation Z). The standard for a QM excludes mortgages with loan characteristics such as negative amortization, balloon and interest-only payment schedules, terms exceeding 30 years, alt-A or no documentation, and total points and fees that exceed 3 percent of the loan amount. In addition, a QM requires that the monthly debt-to-income ratio of borrowers not exceed 43 percent. For more on the ability to repay and QM standards under Regulation Z, see Consumer Financial Protections Bureau (2019), "Ability to Repay and Qualified Mortgage Standards Under the Truth in Lending Act (Regulation Z)," webpage, https://www.consumerfinance.gov/regulations/ability-to-repay-and-qualified-mortgage-standards-under-the-truth-in-lending-act-regulation-z. Return to text
8. A modest net share of banks reported an increase in the minimum required credit score and tightened credit limits. As the only exception, the minimum percent of outstanding balances required to be repaid was basically unchanged. Return to text
9. As exceptions, modest net shares of banks reported tightening the extent to which loans are granted to borrowers not meeting credit score criteria and tightening the loan rate spreads over the cost of funds. Return to text
10. Banks were asked about changes in credit limits (credit card accounts and other consumer loans only), maximum maturity (auto loans only), loan rate spreads over the cost of funds, the minimum percent of outstanding balances required to be repaid each month, the minimum required credit score, and the extent to which loans are granted to borrowers not meeting credit score criteria. Return to text
11. The following were the options for recession probabilities: greater or equal to 80 percent; greater or equal to 60 percent but less than 80 percent; greater or equal to 40 percent but less than 60 percent; greater or equal to 20 percent but less than 40 percent; less than 20 percent. Return to text
12. Bora Durdu, Rochelle Edge, and Daniel Schwindt (2017), "Measuring the Severity of Stress-Test Scenarios," FEDS Notes (Washington: Board of Governors of the Federal Reserve System, May 5), https://doi.org/10.17016/2380-7172.1970. According to the measures in this paper, the average changes in real GDP in the past nine recessions were negative 3.4 percent, negative 1.1 percent, and negative 0.6 percent for severe, moderate, and mild categories, respectively, and the average changes in the unemployment rate were 3.6, 1.8, and 1.1 percentage points, respectively. See the last three rows of Table 3 in the paper. Return to text
13. Foreign respondents were only asked about loans to businesses. Return to text