Every quarter the Federal Reserve conducts an important survey among large domestic banks and the U.S. branches of foreign banks operating in the U.S.
The “Senior Loan Officer Opinion Survey on Bank Lending Practices” typically covers three areas:
- Changes over the past quarter in lending standards and terms that banks are offering to consumers and businesses.
- Changes over the past quarter in loan demand from consumers and business.
- Current events that impact banking.
The survey provides business owners with valuable insight into the state of the economy. The questions relating to lending terms give business owners a sense of how much harder (or easier) it is becoming to obtain financing, and what the cost of that financing will be. The questions relating to loan demand shed light on how competitors and different industries overall are gauging the future performance of the economy. If appetite for loans is increasing, that’s generally seen as a good sign; the opposite is also true.
The latest report, which covers the second quarter of 2010, was conducted July 13-27 and was published on August 16.
Most news reports about the latest survey have covered it by simply saying that “lending standards have eased.” But the story isn’t so simple. We need to take a closer look.
Senior Loan Officer Opinion Survey on Bank Lending Practices Breakdown of respondents
The report is divided into two “tables”. The first table summarizes the results from domestic banks. For the July 2010 report, 57 domestic banks responded to the survey. (Not every bank in the country is asked to complete the survey.) The Federal Reserve instead takes a sample of the largest banks in each of the 12 Federal Reserve Districts. This sample has combined assets of $7 trillion, accounting for 67 percent of all FDIC-insured commercial banking assets in the country. The top 30 banks that responded to the survey account for 96 percent of the total assets of the sample.
The second table summarizes the results from the U.S. branches of foreign banks. 23 such branches replied to the report. These 23 respondents have combined assets of $1 trillion, representing 53 percent of all foreign banking assets in the U.S. The responses provide a clear sense of how foreign banks are operating in the U.S.
Loan classification categories
The report asks specific questions for different types of loans. It breaks out lending into the following categories:
- Commercial and industrial (“C&I”) loans
- Commercial real estate loans (“CRE”) which include construction loans, land development loans, and loans secured by non-farm non-residential real estate
- Prime residential mortgage loans
- Non-traditional residential mortgage loans, which include the infamous Option ARM loans, “Alt-A” loans, interest-only loans, low documentation loans, no documentation loans and loans secured by non-owner occupied properties
- Subprime residential loans
- Consumer term loans
- Consumer credit cards
- Business credit cards
Results from the July 2010 Senior Loan Officer Opinion Survey on Bank Lending Practices
So what does the July 2010 report tell us about what has been happening to lending over the past several months? Here is a summary of the most important take-aways by category for domestic banks, which represent about two-thirds of total respondent bank assets.
Please note that some of the totals may not add up to 100 percent as I’m rounding, summarizing and highlighting the key results only.
The take-away for commercial and Industrial Loans for companies with annual sales of $50 million or more
- At least 80 percent of banks responded no change in: lending standards, maximum line of credit amounts, premiums charged on riskier loans, loan covenants and collateralization requirements; the balance reported loosening these standards.
- One area where banks have been slightly more generous is on the term of loans with 75 percent keeping them the same and 23 percent extending the maximum maturity.
- The cost of credit has been reduced at many banks, with about half of banks lowering the cost of credit and the other keeping them the same.
The take-away for commercial and industrial loans for companies with annual sales below $50 million
- At least 84 percent of bank respondents reported no change in approval standards, the maximum line of credit amount offered, the maximum term of loans offered, the premiums charged on riskier loans, loan covenants and collateralization requirements.
- The cost of credit has only come down at 1 in 3 banks, with two-thirds keeping the cost the same.
Loan demand for commercial and industrial loans among companies of all sizes
- 56 percent of respondents indicate that demand for loans has stayed about the same, with 20 percent reporting stronger demand and 20 percent reporting weaker demand. Fifty eight percent report no change in inquiries from potential business customers about lending.
- 93 percent of banks reporting weaker demand cite “weaker inventory financing needs” among companies as the reason.
The take-away for commercial real estate loans
- 91 percent of respondents have not changed lending standards over the past quarter, while 7 percent have tightened them and two percent have loosened them.
- 68 percent of respondents reported no change in demand for these types of loans, while 12 percent reported an increase in demand and 19 percent reported weaker demand.
The take-away for prime residential mortgages
- 87 percent of respondents have not changed terms over the past quarter, while 9 percent have eased them and four percent have tightened them.
- 33 percent of respondents reported no change in demand for these types of loans, while 38 percent reported an increase in demand and 29 percent reported weaker demand.
The take-away for non-traditional residential mortgages
- 86 percent of respondents have not changed terms over the past quarter, while nine percent have eased them and four percent have tightened them.
- 54 percent of respondents reported no change in demand for these types of loans, while 23 percent reported an increase in demand and 23 percent reported weaker demand.
Go to the article: So What’s Really Going on With Bank Lending?
