Senior Loan Officer Survey: Credit Conditions Still Tightening
Results of the October Senior Loan Officer Opinion Survey on Bank Lending Practices released yesterday by the Board of Governors of the Federal Reserve focuses on three current issues; the status of credit for commercial real estate (CRE) loans and commercial and industrial (C&I) loans and the pending implementation of the Credit Card Accountability Responsibility and Disclosure (Credit CARD) Act.
The survey report, based on responses from 57 domestic banks and 23 U.S. branches and agencies of foreign banks, addresses changes in the supply and demand of loans to businesses and households over the last three months. Included in the October survey, however, were three special questions. Banks were asked about the reasons for the apparent decline in C&I loans over the first eight months of the years; about the status of CRE loans maturing in September, and about changes they have made or plan to make to reach compliance with the Credit CARD legislation.
About 25 percent of banks reported that they had tightened standards on prime residential real estate loans during the third quarter. This is a slightly higher percentage than in July but much lower than the 75 percent that reported such tightening in July of 2008. 30 percent reported they had tightened standards for home equity lines, about the same as in the earlier survey.
For the third consecutive quarter, banks reported a strengthening demand for residential real estate loans while 30 percent reported weakened demand for revolving home equity lines.
About 35 percent of domestic respondents and 20 percent of foreign respondents reported that they had tightened lending standards on CRE loans, down from 45 percent for domestic banks in July but only a slight change for foreign banks. 45 percent of domestic banks reported that demand for the loans had dropped (a decline of 20 percent since July) while 20 percent of foreign banks reported a lessoned demand – about the same as in July.
The October survey question about CRE loans asked about the status of loans maturing in September. 75 percent of domestic banks that had such loans reported that they had extended more than one-quarter of the relevant construction and land development loans and 70 percent said they had extended about the same percentage of non-farm residential real estate loans. Only 15 to 20 percent said they had refinanced 25 percent of more of such loans.
Domestic banks citied as important reasons for the decline in C&I lending the decreased origination of term loans and decreased draws on revolving credit lines. 15% of all banks reported that they had tightened lending standards on loans to all sizes of businesses. This is down from around 30 percent in July and 80 percent one year ago. Six firms reported that they had eased one or more terms – size of loan, length of maturity, or cost of loans. The responses varied little across either bank types or when discussing loans to large, medium, or small sized borrowers.
Slightly more than 40 percent of banks reported that they had increased loan spreads for C&I loans over their cost of funds, but the spreads averaged a decline of about 20 percentage points from that reported in the July survey. Slightly less than 40 percent reported increasing premiums for riskier loans while less than 20 percent reported they had lowered the maximum maturity of loans or decreased the maximum size of lines.
Banks cited as the reasons for tightening credit standards as a reduced tolerance for risk followed by an unfavorable economic outlook or industry specific concerns. These are the same reasons that were cited in the three previous surveys.
The six domestic banks that reported they had eased loan terms said that they did so because of aggressive competition from other lenders, both bank and non-bank.
Domestic banks reported notable declines in the demand for C&I loans. 30 percent noted a decrease in demand from large and 35 percent from small firms. 50 percent had noted such a decline across all size firms in July.
While about 90 percent of foreign banks reported that their lending standards remained relatively unchanged, 15 percent reported narrower loan spreads or lower premiums for riskier loans. Increased competition was also cited here as a reason for the loosening of credit. Only about 5 percent of foreign banks reported a lessening of C&I loan demand.
Responses to the question on the reasons for decreased numbers of C&I loans on the banks' books indicated that decreased originations of term loans and fewer draws on revolving lines were more important reasons for the declines than pay downs
Banks are clearly getting their ducks lined up in anticipation of the implementation of new credit card laws. Of the banks that offer credit cards, 25 percent are already compliant with requirements of the act or expect to be by the end of the year. The remainder will not be compliant until the legislation goes into effect in February. However, their plans are in place. 50 percent of the banks expect to increase interest rate spreads, reduce credit limits, and reduce the availability of loans to borrowers below credit scoring thresholds for prime borrowers and about 45 percent expect to raise minimal credit score and 40 percent to raise annual fees.
Subprime borrowers can expect that 75 percent of the banks will be raising their interest rate spreads and 60 percent will reduce credit-scoring thresholds and/or credit limits.
35 percent of banks expect they will be increasing the use of risk-based pricing and about 30 percent will increase the use of variable interest rates while decreasing the use of fixed rates.
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