Judith H. Hazen

R. Alton Gilbert

English

Research Papers in Economics

August 2001
MonetaryTrends
Views expressed do not necessarily reflect official positions of the Federal Reserve System.
Banks Tighten Terms 
on Business Loans
The Federal Reserve conducts the Senior Loan Officer
Opinion Survey on Bank Lending Practices four times
each year.  The survey questions senior loan officers
about changes in their banks’ terms of lending to busi-
nesses and consumers since the date of the prior survey.
Survey respondents include approximately 60 domestic
banks (generally the largest banks in each Federal Reserve
District) and several U.S. branches and agencies of for-
eign banks.  Distribution is timed so that responses are
available for the January, May, August, and November
Federal Open Market Committee meetings.  During the
last 11 years, the Board has conducted two additional sur-
veys between the regularly scheduled dates, in September
1998 and March 2001.
Each survey includes questions about changes in banks’
standards for approving applications for commercial and
industrial (C&I) loans.  The figure shows the net percent-
age of domestic banks reporting tighter lending standards
for C&I loans to large- and middle-market firms (defined
as those firms with annual sales of $50 million or more)
and to small firms (those with annual sales of less than
$50 million) since the second quarter of 1990.  The fig-
ure shows a net easing of commercial lending standards
between 1993 and 1998, with a brief period of net tighten-
ing in 1995-96.  Banks began reporting tighter credit stan-
dards in mid-1998, and that upward trend has continued
over the past few years.  The spike in 1998 indicates
banks’ reservations about credit quality in the aftermath 
of the Russian government default on debt payments.
The most recent survey, released in May 2001, indi-
cates a slight decline in the number of banks tightening
their lending standards.  This decline, however, does not
mean that banks are beginning to ease their lending stan-
dards for C&I loans.  In fact, for the May survey, no
banks reported easing commercial credit standards.
Instead, the decline simply means that more banks found
their lending standards to be relatively unchanged during
the last three months.
Economists at the Federal Reserve Bank of New York
recently reported evidence that changes in the terms of
lending to businesses derived from the Senior Loan Officer
Opinion Survey help predict bank lending and some mea-
sures of economic activity.
1 The results of this study indi-
cate that credit availability is not determined solely by
interest rates, but also by the standards that must be met to
obtain commercial loans.  Changes in credit standards
affect bank lending and economic activity, after accounting
for the effects of changes in market interest rates. 
The current survey and those for the last four years can be
found at www.federalreserve.gov/boarddocs/SnLoanSurvey.
The release of the August 2001 survey results will be the
next piece of evidence to show if the recent decline in
tightening of standards will continue.
—R. Alton Gilbert and Judith H. Hazen
1 Lown, Cara S., Donald P. Morgan, and Sonali Rohatgi. “Listening to Loan
Officers: The Impact of Commercial Credit Standards on Lending and Output,”
Federal Reserve Bank of New York Economic Policy Review (July 2000), 
pp. 1-16, www.ny.frb.org/rmaghome/econ_pol/500lown.html.

Banks tighten terms on business loans

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Banks tighten terms on business loans

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