The October Senior Loan Officer Opinion Survey on Bank Lending Practices was released on November 3rd. This survey addresses changes in the standards and terms on, and demand for, bank loans to businesses and households on a quarterly basis and is based on the responses from 76 domestic banks and 22 U.S. branches and agencies of foreign banks. The Federal Reserve generally times the quarterly survey so that results are available for the January/February, April/May, August, and October/November meetings of the Federal Open Market Committee. The following is an abridged version of the Federal Reserve report followed by SMU comments and graphs.
Regarding loans to businesses, the October survey results indicated that only a modest net fraction of banks eased their standards for commercial and industrial (C&I) loans to firms of all sizes, but generally larger net fractions of banks eased each of the pricing terms listed in the survey and some non-price terms. Banks also reported having eased standards for construction and land development loans, a category of commercial real estate (CRE) loans included in the survey. On the demand side, modest net fractions of banks reported stronger demand for C&I loans to larger firms; similar net fractions experienced stronger demand for all three categories of CRE loans covered in the survey. Regarding loans to households, some large banks reported having eased standards on closed-end mortgage loans, but respondents generally indicated little change in standards and terms for other types of loans to households. Reported changes in loan demand were mixed. Moderate net fractions of banks reported stronger demand for auto loans and weaker demand for nontraditional closed-end mortgage loans. Demand for other types of loans to households was about unchanged at most banks.
Questions on Commercial and Industrial Lending: A modest percentage of banks reported having eased standards on C&I loans to firms of all sizes. Banks reported having eased, on net, each of the surveyed price terms on C&I loans to firms of all sizes. In particular, a large net fraction of banks eased spreads, a moderate net fraction eased the cost of credit lines and interest rate floors, and a modest net fraction eased premiums charged on riskier loans. Non-price terms generally remained about unchanged, except that modest net fractions of banks reported having eased loan covenants or having increased the maximum size of credit lines on net. Foreign banks reported having eased spreads of C&I loans over banks’ cost of funds. Most respondents that reported having eased either standards or terms on C&I loans over the past three months cited more-aggressive competition from other banks or nonbank lenders as an important reason for having done so. Smaller numbers of banks also attributed their easing to a more favorable or less uncertain economic outlook and increased tolerance for risk.
On the demand side, a modest net fraction of banks reported having experienced stronger demand for C&I loans from large and middle-market firms. A similar net fraction of banks reported a higher number of inquiries from potential business borrowers for new credit lines or increases in existing lines. Banks reported that loan demand from small firms had remained about unchanged on net. To explain the reported increase in loan demand by larger firms, banks cited a wide range of customers’ financing needs, particularly those related to inventories, accounts receivable, investment in plant or equipment, and mergers or acquisitions. Foreign banks also reported having seen stronger demand on net.
Questions on Commercial Real Estate Lending: A modest net fraction of banks reported that they had eased standards on construction and land development loans, while standards for loans secured by nonfarm nonresidential structures and multifamily residential properties remained about unchanged. Moderate net fractions of banks indicated that they had experienced stronger demand for all three subcategories of CRE loans. On balance, foreign banks also reported having eased lending standards on CRE loans and having seen stronger demand for such loans over the past three months.
Questions on Residential Real Estate Lending: A moderate net fraction of large banks reported that they had eased standards on prime residential mortgages over the past three months. Smaller banks reported that standards for prime residential mortgages were about unchanged on net. Reported changes in demand for mortgage loans were mixed. On net, although large banks reported that demand for prime mortgages had weakened, smaller banks experienced increases. However, demand for nontraditional mortgages was weaker, on net, across both bank size groups. Few banks reported having changed their standards on home-equity lines of credit, and respondents indicated that they had experienced little change in demand for such loans on net.
Questions on Consumer Lending: A small net fraction of banks indicated that they were more willing to make consumer installment loans as compared with the previous quarter. A very few banks reported having eased their standards for approving applications for credit cards, and a modest net fraction of banks indicated having eased their standards for auto loans. Most terms on credit cards were little changed, except for credit limits and required minimum credit scores, which a modest net fraction of banks reported having eased. Very few banks reported changes on any of the terms on auto loans, except for a small number of banks that had either increased or reduced the spreads of loan rates over cost of funds. Most banks reported that they had kept their standards and terms on other types of consumer loans unchanged. A moderate fraction of banks, on net, reported having experienced an increase in demand for auto loans over the past three months. In contrast, most banks reported that demand for credit cards and other consumer loans had not significantly changed over the same period.
Special Questions on Subprime Auto Lending: A set of special questions included in this survey asked banks to describe the changes in their terms for subprime auto loans over the past year. Only 19 of the 76 banks that responded to the survey reported that they currently originate subprime auto loans. For each of the surveyed policies—such as loan rate spreads, minimum required down payments, and credit scores— most banks reported no change relative to a year ago. In addition, most of those banks anticipated that their lending policies would stay about unchanged over the next year.
There is a huge amount of valuable data in this report which can be accessed using this internet address by those readers who wish to dig deeper.
At SMU we extract and graph the major elements in the survey. Regarding loans to businesses, the October survey indicated that demand for commercial and industrial (C&I) loans from both large, (>$50MM revenue) and small firms, (<$50MM revenue) decreased. Banks kept lending standards to both large and small firms little changed with a net 10.5 percent reporting easing to large firms and 8.2 percent easing to small firms, (Figure 1 and Figure 2).
What this means for example is that the number of banks reporting an easing of standards to large firms was 10.5 percent higher than the proportion reporting a tightening of standards. In reality most banks are not changing their standards. There are fewer banks reporting an increase in demand for construction and land development loans and demand is at the bottom of the range that has existed since mid-2011. Lending standards were unchanged for this segment after tightening for four quarters, (Figure 3).
Demand for prime real-estate mortgages has been extremely erratic. Demand surged from 25.8 percent of respondents reporting reduced demand in Q2 to 45.1 percent reporting increased demand in Q3 and fell back to a net 1.4 percent reporting an increase in Q4. This level of variability is not mentioned or explained in the official write up by the Fed. On average a net 11.1 percent of banks reported easing lending standards on prime mortgage loans, this was down from 13 percent in Q3, (Figure 4).
The implications of this report are reasonably good for steel people, not as good as the Q3 analysis but still encouraging. There is still a net positive proportion of banks easing lending standards for all categories of loans. Demand still has positive trends though down from Q3.
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