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January 2002 Senior Loan Officer Opinion Survey on Bank Lending Practices

WASHINGTON DC (February 4, 2002) -- The January 2002 Senior Loan Officer Opinion Survey on Bank Lending Practices focused on changes in the supply of and demand for bank loans to businesses and households over the past three months. Supplementary questions addressed changes in terms on commercial real estate loans over the past twelve months, the behavior of customers that refinanced their residential mortgages over the past six months, and the credit quality of loans to households. Loan officers from fifty-five large domestic banks and twenty-three U.S. branches and agencies of foreign banks participated in the survey.

The results of the survey suggest some further tightening of standards and terms for loans to both businesses and households, as well as generally weaker loan demand. The number of foreign and domestic banking institutions that reported tightening standards and terms on commercial and industrial (C&I) loans over the past three months remained high, though it edged down at domestic banks and up at foreign banks. The fraction of domestic institutions that indicated tightened standards for commercial real estate loans in the January survey also remained elevated. Large net percentages of domestic and foreign banks continued to report a weakening of demand for C&I and commercial real estate loans; compared with the October survey, however, somewhat fewer banks reported weaker demand.

Standards for residential mortgage loans were largely unchanged over the past three months, and demand for these loans was moderately stronger on net. Domestic banks, on net, reported tightening standards for all types of consumer loans in the January survey, with the proportion tightening about the same as in the October survey and about half that in C&I loans. There was also some evidence that banks have tightened terms on non-credit card loans to a greater extent than they have terms on credit card loans. According to domestic respondents, demand for consumer loans was roughly unchanged, on net, in January after declining in the previous survey.

Respondents reported that significant fractions of customers seeking to refinance existing mortgages over the past six months extracted equity from their homes, typically increasing their outstanding balances 5 percent to 15 percent. The most common use for the additional funds was said to be the repayment of other debt.

About half of domestic banks reported lending to subprime borrowers. However, most banks that participate in this market reported that these loans constitute less than 5 percent of their total loans to households. Banks were also asked about the credit quality of loans to households relative to what the banks' credit-scoring models would have predicted a year ago (taking into account the behavior of the economy over that period). On net, banks reported that standard residential mortgage loans performed somewhat better than would have been expected, while the performance of other categories of household lending was somewhat worse than predicted.

Lending to Businesses
(Table 1, questions 1-10; Table 2, questions 1-10

Commercial and industrial loans.
As in October, a substantial fraction of domestic banks and foreign branches and agencies reported that they had tightened standards on C&I loans over the past three months. The percentage of domestic banks that reported having tightened their standards on C&I loans to large and middle-market firms edged down to 45 percent from 51 percent in the previous survey; the percentage tightening lending standards on business loans to small firms rose slightly, to 42 percent. The net fraction of U.S. branches and agencies of foreign banks that had tightened standards for customers seeking C&I loans or credit lines rose to 70 percent in January, from 64 percent in October.

Somewhat smaller fractions of domestic banks reported tightening terms to large and middle-market firms than in the past two surveys. The largest change was in the fraction of banks that had increased spreads on loans to these customers, which fell from about 60 percent in October to about 40 percent on net in January. Almost 50 percent of domestic banks increased premiums on riskier loans in January. About a third of banks on net reported tightening other terms, down from about 45 percent in October. In general, about the same net fractions of domestic respondents tightened terms on C&I loans to small firms in January.

In contrast to domestic banks, the fraction of U.S. branches and agencies of foreign banks that tightened terms continued to increase, on balance. The fraction of foreign institutions that raised premiums on riskier loans rose from 64 percent in October to 70 percent, on net, in the current survey. The fraction of foreign banks that strengthened loan covenants also increased, from about 45 percent in October to 52 percent in January. The exception was the share of foreign banks that increased the costs of credit lines; that proportion declined from about 54 percent in October to 35 percent, on net, in January. The share of respondents that reported increasing the spreads of loan rates over their cost of funds remained about constant at 65 percent.

Banks that tightened standards or terms continued to be concerned about the economic outlook. All but one domestic and one foreign bank that had tightened lending standards or terms indicated that a less favorable or more uncertain economic outlook was a reason for changing their lending policies. The same reason was said to be very important by 42 percent of domestic banks, down from two-thirds in the October survey but a bit higher than in August. Worsening industry-specific problems and reduced tolerance for risk also remained among the most commonly cited reasons for tightening terms or standards.

Just over one-half of domestic banks, on net, reported weaker demand from large and middle-market firms, down from almost three-fourths in the October survey. The net proportion of banks that saw a decline in demand from small businesses also decreased, falling to 45 percent. For the second consecutive survey, all but one domestic bank that saw weaker demand reported that a decline in customers' need for bank loans to finance capital expenditures was at least a somewhat important reason for the decline, and in the January survey, more than 45 percent of banks chose this reason as very important. As in the October survey, banks also reported weaker demand for loans to finance mergers and acquisitions, inventory, and accounts receivable. Three of the four banks that reported an increase in demand for C&I loans indicated that demand for inventory financing was a reason for the increase.

The share of foreign branches and agencies reporting weaker demand increased for the second consecutive survey, rising to nearly 50 percent, on net, from about one-third in October. The most frequently cited reason for weaker demand at foreign institutions was a decline in requests for merger and acquisition financing. Nearly all foreign branches and agencies also indicated that demand for loans to finance investment in plant and equipment had decreased, and a majority cited reduced need for inventory financing as a somewhat important reason.

Commercial real estate loans.
The fractions of domestic banks and foreign branches and agencies that reported tighter standards on commercial real estate loans remained about unchanged from the October survey at 46 percent and 23 percent respectively. Responses to a special question addressing changes in terms on commercial real estate loans over the past year also indicated that banks have become less accommodative lenders. More than 40 percent of both domestic and foreign banks increased the spread of loan rates over their cost of funds. Significant fractions of banks also reported that they reduced loan-to-value ratios and increased required debt-service coverage ratios. Nearly all banks that tightened terms expressed concerns about the economic outlook and their local real estate market and also indicated a reduced tolerance for risk.

The demand for commercial real estate loans weakened at survey respondents over the past three months, with 43 percent of domestic and 17 percent of foreign banks, on net, reporting lower demand for this type of loan. A special question indicated that, over the past year, loan demand for most types of commercial structures weakened, particularly demand for loans to finance office buildings and hotels. One exception was loan demand for multi-family homes or apartment buildings, which remained about unchanged, on net, over the past year.

Lending to Households
(Table 1, questions 11-25)

Banks' credit standards for approving residential mortgage loans were largely unchanged over the past three months, with only one bank reporting that it had tightened lending standards somewhat. On net, about 30 percent of domestic respondents reported increased demand for residential mortgages.

A series of special questions asked banks about the behavior of their customers during the recent wave of mortgage refinancing. Sixty percent of domestic banks reported that between 10 percent and 30 percent of their customers increased their outstanding balance when they refinanced their mortgages, and more than 25 percent of banks reported that more than 30 percent of their customers had done so. Domestic banks also reported that those customers who increased the outstanding balance of their mortgages during refinancing typically did so by 5 percent to 15 percent. A few banks indicated that these customers commonly increased the size of their loan by as much as 25 percent. One-fourth of the respondents indicated that, to the best of their knowledge, more than one-half of their customers that received cash out from their refinancing used the funds to repay other debt, and an additional one-third reported that between 30 percent and 50 percent of customers used the funds from refinancing for this purpose. The majority of banks also reported that as many as 30 percent of these customers used the funds for home improvements or consumer expenditures.

Consumer loans.
Almost one-fifth of banks reported that they had tightened standards on both credit card and other types of consumer loans over the past three months, slightly lower fractions than reported having done so in the October survey. Seven percent of banks raised spreads of interest rates charged on outstanding credit card balances relative to their cost of funds, a 10 percentage point decline from the October survey, and 10 percent, on net, did so for other types of consumer loans. About one-fifth of domestic banks increased the minimum required credit score for credit card applications, and 24 percent increased it for other types of consumer loans, up from 14 percent and 13 percent respectively in October. In addition, nearly one-fifth of banks indicated that fewer credit card loans were extended to customers that did not meet credit-scoring thresholds and 31 percent indicated fewer exceptions were made for other types of consumer loans. Banks reported that, on net, demand for consumer loans was about unchanged over the past three months, after having declined in the October survey.

Credit quality of loans to households.
The final set of special questions addressed the extent to which banks participated in the subprime lending market and the overall credit quality of banks loans to households. More than half of the domestic banks that responded indicated that they either held or securitized subprime mortgages over the past year. About one-third of responding banks participated in the market for non-credit card loans to subprime borrowers, while only one-fifth of responding banks were involved in the consumer subprime credit card market. However, the amount of subprime lending was limited: these loans accounted for less than 5 percent of total loans in each category at more than two-thirds of the banks that participated in the subprime markets. In addition, no bank indicated that subprime loans accounted for more than 20 percent of any category of household loan.*

Household credit quality generally was somewhat worse than would have been predicted by the banks' credit-scoring models one year ago, taking account of the economic slowdown. The one exception is residential mortgage loans to standard (not subprime) customers, where loan quality was slightly better, on net, than would have been predicted. By contrast about a third of respondents, on net, reported worse than expected performances for standard credit card and other consumer loans. More than one-half of those few banks that participated in the subprime credit card market reported that credit quality was worse than would have been expected. Similarly, more than one-half of respondents, on net, reported worse-than-expected performance of their other subprime consumer loans. For subprime residential mortgage loans, a bit under a third of banks, on net, reported outcomes below expectations.

Among banks that reported worse loan quality than their models would have predicted, nearly all claimed that a rise in bankruptcy filings triggered by proposed bankruptcy reform legislation was an important reason. A somewhat smaller, but still substantial, fraction mentioned distortions to the economy from the terrorist attacks. Among banks that experienced better loan quality than their models would have predicted, the majority cited unexpectedly high levels of mortgage refinancing that lowered their customers' debt-service burdens. Given the assumption that consensus forecasts of a return to sustainable growth in the economy by the second half of this year materialize, most banks expect that the quality of their household loan portfolios would either remain unchanged or improve somewhat.

    * The Senior Loan Officer Opinion Survey focuses on commercial banks and therefore these responses would not reflect subprime lending activity at nonbank subsidiaries of the respondent banks' holding companies.

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