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The July 2023 Senior Loan Officer Opinion Survey on Bank Lending Practices

The July 2023 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 second quarter of 2023.¹

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 second 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 across all categories of residential real estate (RRE) loans, especially for RRE loans other than government-sponsored enterprise (GSE)-eligible and government loans. Meanwhile, demand weakened for all RRE loan categories. In addition, banks reported tighter standards and weaker demand for home equity lines of credit (HELOCs). Furthermore, standards tightened for all consumer loan categories; demand weakened for auto and other consumer loans, while it remained basically unchanged for credit card loans.

The July SLOOS included two sets of special questions, which inquired about the current level of lending standards relative to the midpoint of the range over which banks' standards have varied since 2005, as well as questions about banks' expectations for changes in lending standards over the second half of 2023 and reasons for these changes.

In response to the first set of special questions regarding the level of standards, banks reported that, on balance, levels of standards are currently on the tighter end of the range for all loan categories. Compared with the July 2022 survey, banks reported tighter levels of standards in every loan category.

Regarding banks' outlook for the second half of 2023, banks reported expecting to further tighten standards on all loan categories. Banks most frequently cited a less favorable or more uncertain economic outlook and expected deterioration in collateral values and the credit quality of loans as reasons for expecting to tighten lending standards further over the remainder of 2023.

Lending to Businesses

(Table 1, questions 1–12; table 2, questions 1–8)

Questions on commercial and industrial lending. Over the second quarter, major and significant net shares of banks reported having tightened standards on C&I loans to large and middle-market firms and small firms, respectively.³ Additionally, banks reported having tightened all queried loan terms on C&I loans to firms of all sizes over the second quarter.⁴ Tightening was most widely reported for spreads of loan rates over the cost of funds, premiums charged on riskier loans, and costs of credit lines. In addition, significant net shares of banks generally reported having tightened the maximum size and maturity of credit lines, loan covenants, collateralization requirements, and the use of interest rate floors to firms of all sizes. By bank size categories, tightening of C&I lending standards and terms was equally widespread across large banks and other banks, as similar net fractions of banks from each bank size category generally reported tightening standards and each term. Meanwhile, significant net shares of foreign banks reported tightening standards on C&I loans, as well as C&I loan terms such as the maximum size of credit lines and premiums charged on riskier loans.

When asked about reasons for tightening standards or terms during the second quarter, the most frequently cited reason was a less favorable or more uncertain economic outlook. Major net shares of banks also reported a reduced tolerance for risk, deterioration in their liquidity positions, worsening industry-specific problems, increased concerns about the effects of legislative changes, supervisory actions, or changes in accounting standards, and decreased liquidity in the secondary market for loans as important reasons for tightening standards or terms for C&I loans.

Regarding demand for C&I loans over the second quarter, major and significant net shares of banks reported weaker demand from large and middle-market firms and small firms, respectively. By bank size categories, weakening in demand was reported by similar net shares of large banks and other banks. Meanwhile, only a modest net share of foreign banks reported weaker demand for C&I loans. Furthermore, significant net shares of both domestic and foreign banks reported that the number of inquiries from potential borrowers regarding the availability and terms of credit lines decreased.

Of the banks reporting weaker demand for C&I loans, major net shares cited decreased customer investment in plant and equipment, decreased inventory financing needs, decreased merger and acquisition financing needs, and decreased accounts receivable financing as important reasons for weaker demand.

Questions on commercial real estate lending. Over the second quarter, major net shares of banks reported having tightened standards on all categories of CRE loans, with similar levels of net tightening reported by large banks and other banks. Meanwhile, major net shares of banks reported weaker demand for all CRE loan categories, with weakening in demand more widely reported by other banks than by large banks. Similarly, a significant net share of foreign banks reported tighter standards and weaker demand for CRE loans over the second quarter.

Lending to Households

(Table 1, questions 13–26)

Questions on residential real estate lending. Over the second quarter, banks reported having tightened lending standards for all categories of RRE loans and HELOCs, with the extent of tightening different across loan types.⁵ Significant net shares of banks reported having tightened standards on non-qualified-mortgage (QM) jumbo residential loans and HELOCs, while moderate net shares reported tightening standards on QM jumbo, non-QM non-jumbo, subprime, and QM non-jumbo, non-GSE eligible loans. In contrast, only modest net shares of banks reported tightening standards on GSE-eligible and government loans. Meanwhile, significant net shares of banks reported weaker demand for HELOCs and all types of RRE loans except for subprime mortgage loans, which saw a modest net share of banks reporting weaker demand.

Questions on consumer lending. Over the second quarter, significant net shares of banks reported having tightened standards for credit card loans and other consumer loans, while a moderate net share reported having done so for auto loans. Consistent with tightened standards for credit card loans, banks also reported having tightened almost all queried terms on consumer loans.⁶ Regarding terms for credit card loans, significant net shares of banks reported having tightened the extent to which loans are granted to some customers who do not meet credit scoring requirements, increasing the minimum required credit scores, and decreasing credit limits. Regarding terms for auto loans, a significant net share of banks reported increasing spreads over their cost of funds, while moderate net shares of banks reported tightening the extent to which loans are granted to some customers who do not meet credit scoring thresholds, increasing the minimum percentages of balances required to be repaid each month, and increasing the minimum required credit scores. For terms on other consumer loans, a significant net share of banks reported increasing loan spreads over their cost of funds, while moderate net shares reported increasing minimum credit scores and tightening the extent to which loans are granted to some customers who do not meet credit scoring thresholds.

Regarding the demand for consumer loans, banks reported that demand for credit card loans remained basically unchanged on net. By bank size categories, a modest net share of large banks reported weaker demand, whereas a moderate net share of other banks reported stronger demand for credit card loans. Significant net shares of banks reported that demand was weaker for auto loans and other consumer loans over the second quarter.

Special Questions on Current Level of Banks' Lending Standards

(Table 1, question 27; table 2, question 9)

As with all July surveys since 2011, the July 2023 survey included a set of special questions that asked respondents to describe the current levels of lending standards at their bank. Specifically, respondents were asked to consider the range over which their lending standards have varied since 2005 and to report where the level of standards currently is relative to the midpoint of that range.

For C&I loans, significant to major shares of banks reported levels of standards that were tighter, on net, than the midpoints of their historical ranges for all C&I loan categories. Responses were similar across bank size categories for most loan types except for syndicated or club loans to investment-grade and below-investment-grade firms, for which the net shares of banks that reported standards being on the tighter end of their ranges were higher among other banks than large banks. The July 2023 survey results indicate a substantial tightening of standards from a year ago, when banks reported standards to be near the midpoint or on the easier end of the range for all C&I loan categories.

Among foreign bank respondents, C&I loan standards were similarly reported to be tighter, on net, than the midpoints of their historical ranges for all categories. Compared with July 2022, the level of standards on syndicated loans to investment-grade firms was unchanged, on net, while the level of standards was tighter for syndicated loans to below-investment-grade firms and non-syndicated loans to firms of all sizes.

For CRE loans, major net shares of banks reported that lending standards were on the tighter ends of their historical ranges for all loan categories. These shares are higher than those reported in the July 2022 survey, in which significant net shares reported standards on the tighter end of their ranges for construction and land development loans and nonfarm nonresidential loans, and standards near the midpoint of their ranges for loans secured by multifamily properties. Similarly, major net shares of foreign banks also reported that standards on all categories of CRE loans were on the tighter end of their historical ranges.

Regarding RRE loans, significant net shares of banks reported that lending standards for GSE-eligible residential loans and jumbo mortgage loans were on the tighter ends of their ranges. For government residential mortgages, a moderate net share of banks reported standards toward the tighter end of the range. Additionally, a significant net share of banks reported that standards on HELOCs were on the tighter end of their range. The net share of banks reporting that levels were at the tighter end of the range was higher in the July 2023 survey than in the July 2022 survey for all RRE loan categories, especially GSE-eligible and government loans, which had been near their midpoint in July 2022.

Regarding consumer loans, standards, on net, were on the tighter ends of their historical ranges for all consumer loan categories, especially for subprime credit card and subprime auto loans, with major net shares of banks reporting standards for these loans being on the tighter end of their ranges. Meanwhile, significant and moderate net shares of banks reported that standards on prime credit card and prime auto loans were on the tighter end of their ranges, respectively. For other consumer loans, a significant net share of banks reported standards on the tighter end of their range. Compared with the July 2022 survey, greater net shares of banks in the July 2023 survey reported standards on the tighter end of the range. In particular, credit card loans and auto loans to prime borrowers had been reported on the easier end of the range in the July 2022 survey but are now on the tighter end.

Overall, responses to the July 2022 and 2023 surveys indicate that banks' lending standards have tightened since 2022 for all loan categories, including some that moved from being on the easier end of the range a year ago to being on the tighter end of the range in July 2023.

Special Questions on Banks' Outlook for the Second Half of 2023

(Table 1, questions 28–29; table 2, questions 10–11)

The July survey also included a set of special questions inquiring about banks' expectations for changes in lending standards over the remainder of 2023, assuming that economic activity evolves in line with consensus forecasts. On balance, banks reported expecting to tighten lending standards further across all loan categories over the remainder of 2023. The net shares of banks expecting to tighten declined relative to those in the April 2023 survey for each loan category.

Significant net shares of banks reported expecting to tighten standards on C&I loans to firms of all sizes. For CRE loans, major net shares of banks reported expecting to tighten standards on construction and land development loans and nonfarm nonresidential loans, while a significant net share expected to tighten standards on loans secured by multifamily properties. Regarding RRE loans, a moderate net share of banks reported expecting to tighten standards on GSE-eligible loans, while a significant net share reported expecting to tighten standards on nonconforming jumbo loans. Additionally, significant net shares of banks reported expecting to tighten standards on credit card and auto loans over the rest of 2023.

The most cited reasons for expecting to tighten lending standards were a less favorable or more uncertain economic outlook, an expected deterioration in collateral values, and an expected deterioration in credit quality of CRE and other loans. Additionally, major net shares of banks also cited an expected reduction in risk tolerance, an expected deterioration in their liquidity position, increased concerns about funding costs and deposit outflows, as well as increased concerns about the effects of legislative, supervisory, or accounting changes as reasons for expecting further tightening.

This document was prepared by Brandon Nedwek, with the assistance of Jessie Wang and Paige Ehresmann, Division of Monetary Affairs, Board of Governors of the Federal Reserve System.

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