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Senior Loan Officer Opinion Survey on Bank Lending Practices

WASHINGTON DC (May 10, 2002) -- The April 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. The survey also contained two sets of supplementary questions. The first set addressed changes in banks' lending policies with regard to commercial paper backup lines of credit over the past twelve months, and the second focused on the effect of problems in the market for terrorism insurance on commercial real estate lending. Loan officers representing fifty­six large domestic banks and twenty­one U.S. branches and agencies of foreign banks participated in the April survey.

Results of the survey indicate some further tightening of standards and terms for loans to both businesses and households. However, the number of domestic and foreign banking institutions that reported having tightened standards and terms on commercial and industrial (C&I) loans over the past three months moved down considerably from the January survey. The net fraction of domestic institutions that indicated that they had tightened standards for commercial real estate loans in the April survey also declined, though it remained relatively high. Banks continued to report a weakening of demand for C&I and commercial real estate loans, albeit at a lesser rate than in January. According to the domestic respondents, standards for residential mortgage loans were largely unchanged over the past three months, and demand for these loans was moderately stronger on net. As in January, a relatively small portion of domestic banks, on net, reported tightening standards for consumer loans. For the second consecutive survey, banks reported tightening terms on non­credit­card loans to a greater extent than they have terms on credit card loans. Demand for consumer loans was roughly unchanged over the past three months.

Lending to Households
Domestic 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, the same as in the January survey. On net, about 6 percent of domestic respondents reported increased demand for residential mortgages, down from 30 percent in January.

Commercial Real Estate Lending
The net fraction of domestic banks that reported tighter standards on commercial real estate loans over the past three months declined from 46 percent in January to 30 percent in the current survey. At branches and agencies of foreign banks, the net percentage reporting tighter standards on commercial real estate loans remained stable at about 20 percent. In the current survey, more than 30 percent of domestic respondents, on net, noted that demand for commercial real estate loans had weakened, down from 43 percent in January; among foreign institutions, 25 percent, on net, reported weaker demand for this type of loan over the past three months.

A set of special questions addressed how the lack of insurance against terrorism has affected commercial real estate lending. About 70 percent of domestic respondents indicated that less than 5 percent of the dollar volume of their commercial real estate loans outstanding -- either held on their books or securitized -- is backed by "high profile" or "heavy traffic" commercial real estate properties. For about one­fifth of banks, loans financing such properties make up between 5 percent and 10 percent of their commercial real estate loan portfolio, while for the remainder, these loans account for between 10 percent and 20 percent of commercial real estate loans outstanding. At foreign institutions, loans backed by high profile properties account for somewhat larger shares of the respondents commercial real estate portfolios.

For the purposes of the survey, "high profile" or "heavy traffic" commercial real estate properties were defined as landmark buildings and commercial properties in their vicinity, stadiums and other sports/entertainment venues, and large shopping malls.

Almost three-quarters of domestic banks indicated that they require terrorism insurance on less than 10 percent of loans financing high profile or heavy traffic commercial real estate properties. Indeed, in their comments, a number of banks noted that their standard commercial real estate loan contracts -- especially for smaller loans (less than $10 million) -- generally do not require terrorism insurance. However, six domestic and six foreign respondents that answered these special questions reported that they require insurance against terrorism on more than 90 percent of loans financing such properties. As of the end of 2002:Q1, these six domestic banks accounted for about 8 percent of all commercial real estate loans in the United States, while the six foreign institutions accounted for less than 2 percent of all commercial real estate loans.

Domestic respondents indicated that if coverage was required and an existing borrower was unable to secure adequate insurance against terrorism for a high profile or heavy traffic commercial real estate property, their most likely response would be to ask for additional collateral and to modify the existing loan covenants to allow for partial coverage. The foreign institutions, by contrast, noted that their most likely course of action would be to increase fees or interest rates associated with the loan, and four foreign respondents indicated that they would be very likely to call the loan or refuse to roll it over when it comes due.

Among domestic banks that received applications for loans to finance high profile commercial real estate properties since the events of September 11, 90 percent indicated that their rejection rate on these loan applications has stayed about the same. Sixty percent of U.S. branches and agencies of foreign banks that received applications for loans to finance these types of properties reported their rejection rate as essentially unchanged. Almost 80 percent of domestic banks and more than 70 percent of foreign institutions indicated that they experienced little or no change in demand for loans to finance high profile and heavy traffic properties because potential borrowers were unable to secure affordable insurance against acts of terrorism. Seven domestic banks reported moderately weaker demand and four domestic and three foreign institutions experienced substantially weaker demand for loans to finance such properties because of issues related to terrorism insurance.


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