Raw Finance

The January 2010 Senior Loan Officer survey conducted by the Federal Reserve Board indicated that commercial banks generally ceased tightening standards on many loan types in the fourth quarter of last year but have yet to unwind the considerable tightening that has occurred over the past two years. The net percentages of banks reporting tighter loan terms continued to trend lower. Banks reported that loan demand from both businesses and households weakened further, on net, over the survey period.

For many major loan categories covered by the survey, the net percentages of respondents that tightened standards in the fourth quarter of 2009 were close to zero. However, banks continued to tighten a number of terms on loans to both businesses and households, although the net fractions of banks that reported doing so in the January survey generally stepped down again. Banks’ policies on commercial real estate lending were an exception, as large net fractions of respondents further tightened their credit standards during the final quarter of last year. In addition, banks reported that they had tightened terms on CRE loans substantially over the past year.

However, while banks are not making it more difficult to get a loan, borrowers are not exactly lining up at the door.  This should be no surprise given that the consumer credit figures clearly show households deleveraging.  According to the survey, demand from both businesses and households for all major categories of loans weakened further, on net, over the past three months. The net fractions of banks that reported weaker demand for business loans continued to decline, while changes in the comparable readings on demand for loans to households were mixed.

The majority of banks indicated that their outlook for the change in credit quality in 2010 was more balanced relative to their pessimistic outlook, when asked one year ago, about the outlook for the change in credit quality in 2009. Outside of commercial and prime residential mortgages, banks generally expect asset quality to stabilize this year.

Commercial and Industrial Loans

Overall, banks reported little net change in their standards for commercial and industrial (C&I) loans in the fourth quarter of 2009. However, almost all of the domestic and foreign institutions that reported having eased credit standards or loan terms over the past three months cited more aggressive competition from other banks or nonbank lenders as an important reason for the change in their lending posture. In addition, a majority of banks that eased some of their loan terms cited a more favorable or less uncertain economic outlook as an important reason for the change in their credit policies.

In contrast, most banks that tightened standards and terms continued to point to a less favorable or more uncertain economic outlook as one of the reasons for the tightening, and many banks reported reduced tolerance for risk as well.

Commercial Real Estate Loans

In contrast to C&I lending, a substantial share of domestic banks, on net, reported having tightened standards on commercial real estate (CRE) loans and having experienced weaker demand for such loans again in the fourth quarter of 2009. Moderate net fractions of foreign banks also reported having tightened standards on CRE loans and having seen weaker demand for such loans over the past three months.

In response to a special question (repeated on an annual basis since 2001), large net fractions of both domestic and foreign institutions again reported having tightened a range of terms on CRE loans over the course of 2009. The largest net tightening was reported on the spreads of loan rates over banks’ cost of funds, debt-service coverage ratios, and loan-to-value ratios.

Residential Real Estate Loans

Banks continued to tighten standards on residential real estate loans over the past three months. In line with recent patterns, a small net fraction of banks tightened standards on prime residential real estate loans over that period, and somewhat larger net fractions of banks tightened standards on nontraditional residential real estate loans. In addition, a moderate net fraction of banks reported weaker demand from prime borrowers for residential real estate loans. Demand from customers seeking nontraditional mortgages also weakened further over the survey period. Only a small net fraction of banks reported having tightened standards on revolving home equity lines of credit over the past three months, but a large net fraction of banks continued to report lower demand for such loans.

Consumer Loans

For the first time in nearly three years, a small net fraction of banks reported an increased willingness to make consumer installment loans now as opposed to three months ago. However, demand for consumer loans of all types reportedly had weakened further since the previous survey.

Regarding credit card loans, a very small net fraction of banks reported having tightened standards on such loans over the past three months. However, substantial net fractions of banks indicated that they had reduced credit limits on credit cards and had become less likely to issue cards to customers not meeting credit scoring thresholds. A moderate fraction reported having increased spreads. These results are consistent with responses to the October 2009 survey, in which banks indicated that they would tighten a wide range of their credit card policies following the enactment of the Credit CARD Act. For consumer loans other than credit card loans, banks reported no change, on net, in their standards. Moreover, respondents indicated little change in most terms on such loans.

Outlook for Delinquencies and Charge-Offs

The January survey included a set of special questions that asked banks about their outlook for delinquencies and charge-offs across major loan categories in the current year, assuming that economic activity progresses in line with consensus forecasts. This set of special questions has been asked on an annual basis since 2006. In the previous two years, large majorities of banks expected widespread deterioration in credit quality over the coming year across all major loan categories. In this survey, by contrast, substantially fewer respondents reported having such expectations; banks anticipate significant additional deterioration in the quality of CRE loans, prime residential mortgages, and revolving home equity lines of credit this year, with the quality of other types of loans expected to change little or improve, on net.

Regarding C&I loans, a substantial net fraction of banks expect delinquencies and charge-offs of such loans to large and middle-market firms to decline in 2010. A much smaller net fraction of banks expect an improvement in the credit quality of C&I loans to small firms.

On the household side, a moderate net fraction of banks indicated that the credit quality of their prime residential mortgages and home equity loans would likely deteriorate further in 2010. However, banks expect portfolios of most other types of consumer and residential real estate loans to experience little further deterioration in credit quality this year–indeed, a moderate net share of banks expect some improvement in credit quality in other consumer loans.

To review the full Senior Loan Officer Survey, please click on the following link: Senior Loan Officer Survey, January 2010.