Recent changes to the Federal Reserve's survey of terms of business lending

Federal Reserve Bulletin, August, 1998 by Thomas F. Brady, William B. English, William R. Nelson

With these considerations in mind, the Federal Reserve decided on the second method: The survey asks respondents to translate their internal ratings into one of five rating categories provided in the survey instructions, including four pass categories: "minimal risk," "low risk," "moderate risk," and "acceptable risk." The moderate-risk category is defined to cover the average loan under average economic conditions at the typical bank. The fifth rating is a "classified" category for risky loans--likely part of workout arrangements for troubled borrowers--that the respondents judge belong in the examination categories "special mention," "substandard," "doubtful," or "loss."(5) The survey also allows for unrated loans because some of the banks consulted indicated that they did not usually rate some types of business loans, most often those to small businesses.

Other New or Revised Items

A second important change to the survey was designed to allow an assessment of the sensitivity of loan rates to changes in market rates and to improve the Federal Reserve's ability to match loan rates to market rates of an appropriate maturity when calculating spreads. To accomplish these aims, banks are asked to report the first date on which rates on variable-rate loans are scheduled to adjust. (Frequently, loans are priced so that the interest rate adjusts at specified intervals over the life of the loan, typically with respect to market rates such as those on large time or Eurodollar deposits.)

The revised survey also asks banks to provide more information about the options available to terminate a loan. Previously, the survey addressed this concept by asking respondents to classify a loan as a "demand loan" if the bank had the right to call it (that is, demand immediate repayment) or renegotiate its terms at any time. Loans were also classified as demand loans if the borrower had the option to prepay it without cost (that is, without a prepayment penalty or "breakage fee"). Banks were instructed to identify demand loans by leaving the reported maturity date blank. This reporting method resulted in the loss of maturity information for demand loans and provided no information on whether the option to terminate the loan belonged to the borrower, the bank, or both. In contrast, the revised survey asks banks to report the date of maturity for every loan having a stated maturity and to report separately whether the loan can be called and whether it has a prepayment penalty.

Items Dropped from the Survey

Two items were dropped from the survey as of May 1997. One asked banks to report the size of the larger loan syndication or participation, if any, of which a reported loan was a part. This information applied to only a small share of loans, and many banks had noted that it was difficult to provide. The other item asked banks whether the commitment under which a loan was extended was formal or informal. This item was dropped because some banks found it difficult to report and because the increased use of informal credit lines by high-quality firms blurred the distinction between the two types of commitments.