Survey addresses changes in supply, demand of bank loans

The January 2003 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 final three months of 2002. In addition, the survey focused on banks' participation in the credit default swap market. Fifty-nine domestic and 20 foreign banking institutions responded to the survey.

Domestic and foreign institutions continued to tighten lending standards and terms for commercial and industrial loans in the past three months, results similar to the October survey. Business loan demand again was reportedly weaker on balance, but the net fraction of banks reporting weaker demand was significantly lower than in October, and several banks reported stronger demand.

A significant portion of domestic bank respondents with assets greater than $20 billion and half of foreign institutions use credit default swaps either to hedge loan risk or to increase credit exposure. However, most other domestic banks reported that they made little or no use of credit default swaps.

On the household side, the fractions of banks that tightened standards and terms on credit cards and other consumer loans remained at the modest levels of recent surveys. However, the January survey is the second consecutive survey to indicate that some banks are beginning to tighten standards on home mortgages.

Business lending

In January, the percentage of domestic banks that reported having tightened standards on C&I loans to large and middle-market firms remained at about 20 percent for the third consecutive survey. In contrast to the previous two surveys, however, three of the banks that tightened lending standards to larger firms in the most recent survey classified the tightening as considerable. The percentage of domestic banks that reported tightening standards for small firms edged down from 18 percent in October to 14 percent in January.

The number of domestic banks that reported tightening terms on large and middle-market borrowers declined a bit between the October and the January surveys: the net share of banks that reported raising fees on credit lines fell to 22 percent from 30 percent, while the net share of banks that reported increasing collateralization requirements slipped to 17 percent from 23 percent.

Although a less favorable economic outlook was still cited by most domestic banks as at least a somewhat important reason for tightening lending conditions, the fraction of banks that listed this as a very important reason declined from 23 percent in October to 12 percent in January. In addition, the fraction of banks citing reduced tolerance for risk fell from 71 percent in October to 63 percent in the current survey. By contrast, the percentage of domestic banks reporting that worsening industry-specific problems were a reason for tightening rose substantially, from 39 percent in October to 66 percent in January.

Credit default swaps

Credit default swaps have become an increasingly important tool for managing credit risk at a number of financial institutions. Of the 36 largest domestic banks that participated in the survey, about 35 percent use credit default swaps to hedge risk in their commercial and industrial loan portfolio. Even among those banks that use CDS, however, the majority do so for less than 4 percent of their total commercial and industrial loan commitments (outstanding loans plus unused lines of credit).

By contrast, about half of the foreign banks surveyed reported purchasing credit protection using CDS, and 25 percent indicated that more than 8 percent of their total commercial and industrial loan commitments are hedged in this fashion. The most commonly cited reason, by both foreign and domestic institutions, for buying credit protection is that purchasing the CDS is superior to selling a loan because it preserves the bank-borrower relations.

Lending to households

The share of banks tightening standards on residential mortgage loans edged up to 11 percent in January from 10 percent in the October survey. Notably, these were the first two indications of any noticeable tightening in over a decade.

The net fraction of respondents that reported stronger demand for mortgages to purchase homes over the past three months dropped to 7 percent in January from 40 percent in the previous survey. Moreover, the share of banks reporting substantially stronger demand fell from 14 percent in October to 2 percent in the current survey.

As in the October survey, about 15 percent of domestic banks indicated that they had tightened standards on credit card loans over the past three months. However, in the current survey the share of banks that reported tightening standards for other consumer loans edged down to 9 percent from 15 percent in October.

Few banks reported that they had tightened any terms on either their credit card loans or other consumer loans over the past three months. On net, demand for consumer loans was reportedly about unchanged in the past three months.