Senior Loan Officer Opinion Survey on Bank Lending Practices
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The January 2023 Senior Loan Officer Opinion Survey on Bank Lending Practices
The January 2023 Senior Loan Officer Opinion Survey (SLOOS) on Bank Lending Practices 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 fourth quarter of 2022.1
Regarding loans to businesses, survey respondents on balance reported tighter standards and weaker demand for commercial and industrial (C&I) loans to large, middle-market, and small firms over the fourth quarter.2 Meanwhile, banks reported tighter standards and weaker demand for all commercial real estate (CRE) loan categories.
For loans to households, banks reported that lending standards tightened or remained basically unchanged across all categories of residential real estate (RRE) loans and demand for these loans weakened. In addition, banks reported tighter standards and weaker demand for home equity lines of credit (HELOCs). Standards tightened and demand weakened, on balance, for credit card, auto, and other consumer loans.
The January SLOOS survey also included a set of special questions inquiring about banks' expectations for changes in lending standards, borrower demand, and loan performance over 2023. Banks, on balance, reported expecting lending standards to tighten, demand to weaken, and loan quality to deteriorate across all loan types.
Lending to Businesses
(Table 1, questions 1–12; table 2, questions 1–8)
Questions on commercial and industrial lending. Over the fourth 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 all queried terms on C&I loans to firms of all sizes over the fourth quarter.4 Tightening was most widely reported for premiums charged on riskier loans, spreads of loan rates over the cost of funds, and costs of credit lines. In addition, significant net shares of banks reported having tightened loan covenants and collateralization requirements to firms of all sizes. Moderate net shares of banks reported having tightened the maximum size of credit lines to firms of all sizes. Tightening of the maximum maturity of loans or credit lines was reported by a significant net share of banks for large and middle-market firms, while a moderate net share reported this term for small firms.5 Similarly, a significant net share of foreign banks reported having tightened standards for C&I loans over the fourth quarter.
Major net shares of banks that reported having tightened standards or terms on C&I loans 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, less aggressive competition from other banks or nonbank lenders, deterioration in their current or expected liquidity position, and increased concerns about the effects of legislative changes, supervisory actions, or changes in accounting standards as important reasons for tightening lending standards and terms.
Regarding demand for C&I loans over the fourth quarter, significant net shares of banks reported weaker demand for loans from firms of all sizes. Further, a significant 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 fourth quarter.
Of the banks reporting weaker demand for C&I loans, major net shares cited decreased customer investment in plant or equipment, as well as decreased financing needs for mergers or acquisitions, inventories, and accounts receivable as important reasons for the weaker loan demand.6
Questions on commercial real estate lending. Over the fourth quarter, major net shares of banks reported tightening standards for all types of CRE loans. Meanwhile, major net shares of banks reported weaker demand for loans secured by nonfarm nonresidential properties and construction and land development loans, and a significant net share of banks reported weaker demand for loans secured by multifamily properties. A moderate net share of foreign banks reported tighter standards for CRE loans, while a modest net share 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 fourth quarter, lending standards tightened or remained basically unchanged across all RRE loan types and for HELOCs.7 Moderate net shares of banks reported tightening standards for jumbo and subprime residential mortgages, while modest net shares reported tighter standards on HELOCs, qualified mortgage (QM) non-jumbo non-government-sponsored enterprise (GSE)-eligible mortgages, and non-QM non-jumbo mortgages. In contrast, standards remained basically unchanged for GSE-eligible and government residential mortgages.
Meanwhile, major net shares of banks reported weaker demand for all RRE loans over the fourth quarter, except for HELOCs, for which a significant net share of banks reported weaker demand.
Questions on consumer lending. Over the fourth quarter, a significant net share of banks reported tightening lending standards for credit card loans, while moderate net shares of banks reported tighter standards for auto and other consumer loans. Banks also reported tightening most queried terms on credit card loans. Specifically, moderate net shares of banks reported higher minimum credit score requirements as well as tightening both credit limits and the extent to which loans are granted to some customers that do not meet credit scoring thresholds. Similarly, banks reported tightening most queried terms on auto loans, on net. In particular, a moderate net share of banks reported wider interest rate spreads on such loans, while modest net shares reported higher minimum repayments and higher minimum credit score requirements. For other consumer loans, modest net shares of banks reported widening spreads over the cost of funds, increasing the minimum required credit score, and tightening the extent to which loans are granted to borrowers not meeting credit score criteria. The remaining terms and conditions for each type of consumer loan remained basically unchanged.8
Regarding demand for consumer loans, significant net shares of banks reported weaker demand for auto and other consumer loans, while a moderate net share of banks reported weaker demand for credit card loans.
Special Questions on Banks' Outlook for 2023
(Table 1, questions 27–40; table 2, questions 9–16)
The January SLOOS survey also included a set of special questions inquiring about banks' expectations for changes in lending standards, borrower demand, and asset quality over 2023, assuming that economic activity evolves in line with consensus forecasts.9 On balance, banks reported expecting lending standards to tighten and loan demand to weaken. Meanwhile, banks reported expectations of a broad deterioration in loan quality during 2023.
Regarding lending standards, major net shares of banks expected to tighten standards for C&I loans to firms of all sizes and for all types of CRE loans over 2023. Meanwhile, significant net shares of banks also reported expecting to tighten standards for nonconforming jumbo mortgage loans, credit card loans, and auto loans.10 A moderate net share of banks also reported expecting to tighten standards on GSE-eligible residential mortgage loans. The most frequently cited reasons for expecting to tighten standards over 2023, reported by major net shares of banks, included an expected deterioration in collateral values, a reduction in risk tolerance, and a deterioration in credit quality of the bank's loan portfolio.
Meanwhile, major net shares of banks reported expecting loan demand to weaken across CRE and RRE loan categories over 2023, while significant net shares of banks reported expecting loan demand to weaken for C&I loans to firms of all sizes and auto loans. A moderate net share of banks expected demand for credit cards to weaken. The most frequently cited reasons for weaker loan demand over 2023, reported by major net shares of banks, included an expected increase in interest rates, expected lower spending or investment needs, an expected deterioration in terms other than interest rates, an expected easing in supply chain disruptions, and an expected decrease in precautionary demand for cash and liquidity.
Regarding expectations for credit quality—as measured by delinquencies and charge-offs—major or significant net shares of banks reported expecting a deterioration in credit quality across all loan types over 2023.11 Specifically, major net shares of banks reported expecting credit quality to deteriorate for C&I loans to small firms, syndicated leveraged and non-syndicated C&I loans to large and middle-market firms, nonfarm nonresidential and construction and land development CRE loans, consumer loans to nonprime borrowers, and RRE loans. Additionally, significant net shares of banks reported expecting loan quality to deteriorate for consumer loans to prime borrowers, syndicated nonleveraged C&I loans to large and middle-market firms, and CRE loans secured by multifamily properties.
Regarding foreign banks, significant net shares of such banks reported expecting tighter standards for all C&I and CRE loans over 2023. In addition, foreign banks also reported expecting weaker or basically unchanged demand and a broad deterioration in the quality of C&I and CRE loans during 2023.
This document was prepared by Luke Morgan, with the assistance of Ria Sonawane, Division of Monetary Affairs, Board of Governors of the Federal Reserve System.
1. Responses were received from 69 domestic banks and 18 U.S. branches and agencies of foreign banks. Respondent banks received the survey on December 19, 2022, and responses were due by January 6, 2023. 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 annuals 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 September 30, 2022. Return to text
3. For questions that ask about lending standards or terms, "net fraction" (or "net percentage") 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 bank's cost of funds, premiums charged on riskier loans, loan covenants, collateralization requirements, and use of interest rate floors. Return to text
5. Banks were asked about the costs, maximum size, and maximum maturity of credit lines, spreads of loan rates over the bank's cost of funds, premiums charged on riskier loans, terms on loan covenants, collateralization requirements, and the use of interest rate floors. Return to text
6. Similarly, major net shares of foreign banks reporting weaker demand for C&I loans cited decreased customer investment in plant or equipment and decreased merger and acquisition financing needs as reasons for weaker loan demand. 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 Protection 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. Banks were asked about the minimum required credit score as well as changes in credit limits (credit card accounts and other consumer loans only), maximum maturity (auto loans only), loan rate spreads over costs of funds, the minimum percent of outstanding balances required to be repaid each month, and the extent to which loans are granted to borrowers not meeting credit score criteria. Return to text
9. In banks' comments about their interpretation of consensus forecasts, the majority of respondents reported using both internal and external forecasts. Return to text
10. Regarding the outlook for RRE loans, banks were asked about their expectations regarding lending standards, demand, and loan performance for GSE-eligible and nonconforming jumbo residential mortgage loans. For the outlook of consumer loans, banks were asked about their expectations regarding lending standards and demand for credit card loans and auto loans. Banks were also asked about their expectations regarding loan performance for consumer loans for prime and nonprime borrowers. Return to text
11. Regarding the performance of business loans, banks were queried about expectations for the performance of four types of C&I loans (non-syndicated loans, syndicated non-leveraged loans, syndicated leveraged loans, and loans to small firms) and three types of CRE loans (multifamily loans, nonfarm nonresidential loans, and construction and land development loans). Return to text