Senior Loan Officer Opinion Survey - Money Makes The World Go Round

The July 2008 Senior Loan Officer Opinion Survey on Bank Lending Practices addressed changes in the supply of, and demand for, bank loans to businesses and households over the past three months.

In the current survey, large net fractions of domestic institutions reported having tightened their lending standards and terms on all major loan categories over the previous three months.

Questions on commercial and industrial lending.

About 60 percent of domestic banks—a slightly larger fraction than in the April survey—reported having tightened lending standards on commercial and industrial (C&I) loans to large and middle-market firms over the past three months. About 65 percent of those institutions—up notably from roughly 50 percent in the April survey—also indicated that they had tightened their lending standards on C&I loans to small firms over the same period. Significant majorities of domestic respondents indicated that they had tightened selected price terms on C&I loans to firms of all sizes: About 80 percent of banks—up from roughly 70 percent in the April survey—noted that they had increased spreads of loan rates over their cost of funds on C&I loans to large and middle-market firms, and about 70 percent of respondents—a somewhat higher fraction than in the April survey—reported having widened spreads on loans to small firms. In addition, considerable fractions of domestic respondents reported having boosted non-price-related lending terms on C&I loans to firms of all sizes over the survey period, and the fraction of banks that tightened such terms on loans to small firms increased significantly relative to the April survey.

About 35 percent of U.S. branches and agencies of foreign banks—down from about 60 percent in the April survey—indicated that they had tightened their lending standards on C&I loans over the past three months. Majorities of foreign respondents reported that they had tightened various price terms on such loans, although the fractions of those institutions that reported having tightened such terms over the previous three months were, on net, significantly smaller than in the April survey. For example, about 60 percent of foreign banks—down from about 80 percent in the April survey—reported having raised spreads of loan rates over their cost of funds over the past three months.

Very large majorities of domestic and foreign respondents pointed to a less favorable or more uncertain economic outlook, their bank’s reduced tolerance for risk, and the worsening of industry-specific problems as reasons for tightening their lending standards and terms on C&I loans over the past three months. Roughly 65 percent of foreign respondents—up from about 45 percent in the April survey—also noted that concerns about their bank’s current or expected capital position had contributed to the more-stringent lending policies over the past three months. In contrast, only about 25 percent of domestic respondents—down from about 35 percent in the April survey—reported having tightened their lending standards because of concerns about their bank’s current or expected capital position.

On balance, the July survey pointed to a further weakening of C&I loan demand over the past three months. On net, about 15 percent of small domestic and 25 percent of foreign banks reported weaker demand for C&I loans from firms of all sizes over the survey period. About 15 percent of large domestic banks, on net, experienced weaker demand from small firms, although about 5 percent of these banks, on balance, reported that demand for C&I loans from large and middle-market firms had increased over the past three months.

Substantial majorities of domestic institutions that experienced weaker loan demand over the past three months cited a decrease in customers’ needs to finance investment in plant or equipment as well as firms’ decreased need to finance inventories. In addition, about 65 percent of domestic and 70 percent of foreign respondents pointed to a decrease in customers’ needs for merger and acquisition financing as a reason for the lower demand for C&I loans. Regarding future business, small domestic and foreign institutions, on balance, reported that inquiries from potential business borrowers were about unchanged during the survey period. In contrast, about 15 percent of large domestic banks, on net, reported an increase in the number of inquiries from potential business borrowers over the past three months.

Questions on commercial real estate lending.

About 80 percent of domestic banks—a fraction similar to that in the April survey—reported having tightened their lending standards on commercial real estate loans over the past three months. About 35 percent of foreign banks—down from roughly 55 percent in the April survey—also indicated that they had tightened their lending standards on commercial real estate loans. Regarding demand for these types of loans, about 30 percent of domestic banks and 45 percent of foreign institutions—fractions somewhat smaller than those in the April survey—reported weaker demand for commercial real estate loans over the survey period on net.