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posted on 09 May 2017

Banks Reportedly Eased Most Terms On Commercial And Industrial Loans For Large And Middle-market Firms

from the Federal Reserve

The April 2017 Senior Loan Officer Opinion Survey on Bank Lending Practices addressed changes in the standards and terms on, and demand for, bank loans to businesses and households over the past three months, which roughly corresponds to the first quarter of 2017.[1] The survey also included a set of special questions on commercial real estate (CRE) lending conditions. This summary discusses the responses from 72 domestic banks and 20 U.S. branches and agencies of foreign banks.[2]

[click here to see all charts in this report]

Regarding loans to businesses, the April survey results indicated that over the first quarter of 2017, on balance, banks left their standards on commercial and industrial (C&I) loans basically unchanged. A modest net fraction of banks reported weaker demand for C&I loans, while inquiries for C&I lines of credit remained basically unchanged.[3]

On balance, banks reported tightening standards on CRE loans. Responding to a set of special questions, banks reported tightening most credit policies on CRE loans over the past year. In doing so, banks cited a less favorable or more uncertain outlook for CRE property prices, capitalization rates, and vacancy rates or other fundamentals as their most important factors. Participants also cited a reduced tolerance for risk as an important reason for tightening CRE credit policies. On balance, banks reported weaker demand for CRE loans in the first quarter.

Regarding loans to households, standards and demand for most categories of residential real estate (RRE) mortgage loans were little changed on balance. For consumer lending, banks reported tightening standards on and weaker demand for auto loans and easing standards on and weaker demand for credit card loans. Standards and demand for other types of consumer loans were basically unchanged.

Lending to Businesses

(Table 1, questions 1-12; Table 2, questions 1-8)

Questions on commercial and industrial lending. On balance in the first quarter of 2017, domestic banks reportedly left C&I lending standards for firms of all sizes unchanged.[4] Banks reportedly eased most terms on C&I loans for large and middle-market firms: A moderate net percentage of banks increased the maximum size of credit lines, reduced the cost of such credit lines, narrowed the spread of loan rates over their cost of funds, and eased loan covenants. A modest net share of banks reported increasing the maximum maturity of C&I loans and reducing the use of interest rate floors. The remaining terms surveyed remained basically unchanged on net.

Banks also reported easing some of the terms of C&I loans to small firms. Specifically, a moderate net share of banks narrowed the spread of C&I loan rates over their cost of funds. Modest net percentages of banks also reported increasing the maximum size of credit lines and maturity of loans and lowering the cost of credit lines, while the remaining terms surveyed remained basically unchanged on net.

Major net shares of domestic banks that reported having eased either their standards or terms on C&I loans over the past three months cited more aggressive competition from other banks or nonbank financial institutions and a more favorable or less uncertain economic outlook as important reasons. Significant fractions of such banks also cited increased tolerance for risk, an improvement in their current or expected capital position, and improvements in industry-specific problems as important reasons. A moderate net share of banks reported increased liquidity in the secondary market for these loans as a reason for easing C&I loan terms and standards, and a modest net share of banks cited reduced concerns about the effects of legislative changes, supervisory actions, or changes in accounting standards as reasons for doing so.

That said, some domestic banks reportedly tightened either standards or terms on C&I loans over the past three months, and a major net share of these banks cited as important reasons a less favorable or more uncertain economic outlook; reduced tolerance for risk; and increased concerns about the effects of legislative changes, supervisory actions, or changes in accounting standards. Several other factors were also cited by such respondents in this regard: Significant net fractions of banks indicated a deterioration in their current or expected capital positions, worsening of industry-specific problems, less aggressive competition from other banks or nonbank financial institutions, decreased liquidity in the secondary market for these loans, and deterioration in their current or expected liquidity positions.

Regarding the demand for C&I loans, modest net shares of domestic banks reported weaker demand for C&I loans from firms of all sizes during the first quarter. Meanwhile, banks reported that inquiries for C&I lines of credit were basically unchanged.

Major net fractions of banks that reported weaker C&I loan demand noted the following as important reasons: decreases in customers' investment in plant or equipment and decreases in customers' merger and acquisition financing needs. In addition, significant net shares of banks cited lower customer inventory and accounts receivable financing needs, lower precautionary demand for cash or liquidity, increases in customers' internally generated funds, and a shift in customer borrowing to other banks or nonbank financial institutions as important reasons for weaker C&I loan demand.

Meanwhile, major net percentages of domestic banks that reported stronger C&I loan demand cited as important reasons customers' increased need to finance accounts receivable, investment in plant or equipment, and merger or acquisition activity. Major net fractions of banks that reported stronger C&I loan demand also highlighted a shift in customers' borrowing to their bank from other banks or nonbank financial institutions as an important reason. A significant net share of banks also cited an increase in customers' inventory financing needs as an important reason for stronger C&I loan demand, and moderate net shares of banks cited a decrease in customers' internally generated funds or an increase in customers' precautionary demand for cash and liquidity.

Regarding C&I lending conditions at foreign banks in the first quarter of 2017, a moderate net share of such banks reported that they tightened standards on C&I loans. Foreign banks' changes in terms on C&I loans were mixed. On the one hand, a moderate net share reported tightening collateralization requirements, and modest net percentages reported lowering the maximum size and maturity of credit lines and tightening loan covenants on C&I loans. On the other hand, significant and moderate net shares of foreign banks reported narrowing spreads of loan rates over their cost of funds and lowering the premium charged on riskier loans, respectively. Modest net shares of foreign banks reported lowering the cost of credit lines and reducing the use of interest rate floors.

A modest net fraction of foreign banks reported weaker demand for C&I loans, and the number of inquiries from potential business borrowers regarding lines of credit was basically unchanged.

Questions on commercial real estate lending. Banks generally reported tightening their lending standards on all three major types of CRE loans in the first quarter.[5] In particular, significant net shares of banks indicated that their lending standards for construction and land development and for multifamily loans tightened during the first quarter, while a moderate net fraction of banks reported tightening standards for loans secured by nonfarm nonresidential properties. Modest net fractions of banks reported weaker demand for all three major types of CRE loans.

Meanwhile, in the first quarter, foreign banks reported that their credit standards for approving applications for CRE loans were basically unchanged. Furthermore, a modest net share of foreign banks reported stronger demand for CRE loans.

Special Questions on Changes in Banks' Credit Policies on Commercial Real Estate Loans over the Past Year

(Table 1, questions 27-30; Table 2, questions 9-12)

The April survey included a set of special questions on banks' CRE lending policies. Three special questions asked banks separately about changes in their credit policies over the past year for each of the three major CRE loan categories included in the survey. The fourth question asked banks about their reasons for tightening or easing their CRE credit policies over the past year.

On balance, banks reported tightening most credit policies on CRE loans. A significant net share of banks reported increasing spreads over their cost of funds on all three major types of CRE loans surveyed. Significant net percentages of banks also reported lowering loan-to-value ratios on construction and land development and on multifamily loans, while a moderate net share of banks did so on nonfarm nonresidential loans. A significant net fraction of banks raised debt service coverage ratios on multifamily loans, while moderate and modest net shares of banks did so on construction and land development and on nonfarm nonresidential loans, respectively. Moderate and modest net shares of banks also reported reducing the market areas served for multifamily and for construction and land development loans, respectively. Furthermore, moderate and modest net percentages of banks reduced the length of the interest-only payment period on multifamily and nonfarm nonresidential loans, respectively, while modest net shares of banks lowered maximum loan maturities on these types of loans.

Regarding their reasons for tightening their CRE credit policies over the past year, major net fractions of banks cited a less favorable or more uncertain outlook for CRE property prices, vacancy rates or other fundamentals on CRE properties, and capitalization rates, as well as reduced tolerance for risk. Significant net shares of banks also reported less aggressive competition from other banks or nonbank financial institutions and increased concerns about the effects of regulatory changes or supervisory actions as important reasons for tightening CRE credit policies. Moderate and modest net percentages of banks also cited increased concerns about their capital adequacy or liquidity position and their diminished ability to securitize CRE loans as important reasons for tightening CRE credit policies, respectively.

Banks that reportedly eased their CRE credit policies over the past year gave a range of reasons for doing so. A major net share of banks cited more aggressive competition from other banks or nonbank financial institutions as an important factor. A significant net percentage of banks cited a more favorable or less uncertain outlook for vacancy rates or other fundamentals as an important reason for easing CRE credit policies. Furthermore, moderate net shares of banks reported a more favorable or less uncertain outlook for CRE property prices and increased tolerance for risk, and a modest net percentage of banks cited more favorable or less uncertain capitalization rates as important reasons for easing CRE credit policies.

Regarding foreign banks' reporting of changes in their CRE credit policies over the past year, responses were mixed. On the one hand, foreign banks reported easing some terms: Significant and moderate net shares of foreign banks reported increasing the maximum loan size and expanding the market areas served on nonfarm nonresidential loans, respectively. On the other hand, other terms tightened: Significant and moderate net shares of foreign banks increased the spread of loan rates over their cost of funds and lowered loan-to-value ratios on nonfarm nonresidential loans, respectively. Furthermore, moderate net shares of foreign banks reported lowering the maximum loan size, increasing the spread of loan rates over their cost of funds, and reducing the market areas served on construction and land development loans. Foreign banks' terms on multifamily loans reportedly remained basically unchanged on net.

Lending to Households

(Table 1, questions 13-26)

Questions on residential real estate lending. During the first quarter, banks, on net, reported that both loan demand and their lending standards were basically unchanged on most categories of RRE home-purchase loans.[6] Moderate and modest net shares of banks reported easing credit standards on GSE-eligible and government mortgage loans, respectively, while standards on other types of RRE loans were basically unchanged. Moderate and modest net shares of banks reported weaker demand for government and non-QM non-jumbo mortgage loans, respectively. Furthermore, banks, on balance, reported little change to credit standards and demand for revolving home equity lines of credit over the first quarter.

Questions on consumer lending. A moderate net fraction of banks reported tightening lending standards on auto loans over the first quarter. On balance, banks tightened most terms on auto loans: A moderate net fraction of banks reported widening the spread of loan rates over their cost of funds and reducing the extent to which loans are granted to some customers that do not meet credit scoring thresholds for auto loans. In addition, a modest net fraction of banks increased the minimum required credit score on auto loans.

Regarding credit card loans, a modest net fraction of banks reported easing their lending standards on credit cards during the first quarter and most terms on such loans were basically unchanged. Meanwhile, a moderate net percentage of banks reported that they were more willing to make consumer installment loans. Lending standards and terms on other consumer loans remained basically unchanged on net.

Banks, on balance, reported weaker demand for most consumer loan categories during the first quarter. Specifically, moderate net fractions of banks reported weaker demand for credit card and auto loans, while demand for other consumer loans remained basically unchanged on net.

This summary was prepared by Judit Temesvary with the assistance of Akber Khan and Edward Kim, Division of Monetary Affairs, Board of Governors of the Federal Reserve System.


1. Respondent banks received the survey on or after March 27, 2017, and responses were due by April 10, 2017.

2. Unless otherwise indicated, this summary refers to reports from domestic respondents.

3. For questions that ask about lending standards or terms, "net fraction" (or "net percentage") refers to the fraction of banks that reported having tightened ("tightened considerably" or "tightened somewhat") minus the fraction of banks that reported having eased ("eased considerably" or "eased somewhat"). For questions about loan demand, this term refers to the fraction of banks that reported stronger demand ("substantially stronger" or "moderately stronger") minus the fraction of banks that reported weaker demand ("substantially weaker" or "moderately weaker"). For this summary, when standards, terms, or demand are said to have "remained basically unchanged," the net percentage of respondent banks that reported either tightening or easing of standards or terms, or stronger or weaker demand, is between 0 and 5 percent; "modest" refers to net percentages between 5 and 10 percent; "moderate" refers to net percentages between 10 and 20 percent; "significant" refers to net percentages between 20 and 50 percent; and "major" refers to net percentages over 50 percent.

4. The survey asked respondents separately about their standards for, and demand from, large and middle-market firms, which are generally defined as firms with annual sales of $50 million or more, and small firms, which are those with annual sales of less than $50 million.

5. The three categories of CRE loans that banks are asked to consider are construction and land development loans, loans secured by nonfarm nonresidential properties, and loans secured by multifamily residential properties.

6. The seven categories of residential home-purchase loans that banks are asked to consider are those eligible for purchase by government-sponsored enterprises (known as GSE-eligible mortgage loans); government; QM non-jumbo, non-GSE-eligible; QM jumbo; non-QM jumbo; non-QM non-jumbo; and subprime. See the survey results tables that follow this summary for a description of each of these loan categories. The definition of a qualified mortgage (QM) was introduced in the 2013 Mortgage Rules under the Truth in Lending Act (12 CFR Part 1026.32, Regulation Z). The standard for a QM excludes mortgages with loan characteristics such as negative amortization, balloon and interest-only payment schedules, terms exceeding 30 years, alt-A or no documentation, and total points and fees that exceed 3 percent of the loan amount. In addition, a QM requires that the monthly debt-to-income ratio of borrowers not exceed 43 percent. For more on the ability to repay and QM standards under Regulation Z, see the Consumer Financial Protection Bureau's website at www.consumerfinance.gov/regulations/ability-to-repay-and-qualified-mortgage-standards-under-the-truth-in-lending-act-regulation-z.

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