Senior Loan Officers Hold the Power

Have you ever gone to a bank to get a loan for a house or a car and been told you didn’t qualify or that you were going to have to pay a higher interest rate because your credit score was less than pristine? Have you ever received a letter in the mail informing you that your limit on your credit card had been increased because you were such a good customer? Now for the real question I am going to address in this article…have you ever sat back and wondered who made the decision that you were too high of a credit risk to qualify for a lower interest rate on your mortgage, or have you ever wondered who decided that you were such a good credit risk that the credit card company was going to increase your limit?

[VIDEO] Understanding the Senior Loan Officer Survey

The answer

: As you will learn in the video that accompanies this article, senior loan officers and other members of management make the decisions regarding to whom they will lend and to whom they will not. Sure, there are some guidelines that the Federal Government issues to help insure best practices, but in the end, it is the financial institutions themselves—the banks, the credit card companies and so on—that make the decisions.

What is the Senior Loan Officer Opinion Survey on Bank Lending Practices?

The Senior Loan Officer Opinion Survey on Bank Lending Practices is a quarterly survey of of approximately sixty large domestic banks and twenty-four U.S. branches and agencies of foreign banks that is conducted by the Federal Reserve. Questions in the survey cover changes in the standards and terms of the banks’ lending and the state of business and household demand for loans. The survey often includes questions on one or two other topics of current interest—such as changes in the supply of, and demand for, bank loans to businesses and households. [Check out current and past surveys here.]

In other words, the Senior Loan Officer Opinion Survey on Bank Lending Practices determines how easy or difficult it is for companies and individuals to obtain credit.

Why the Federal Reserve Wants to Know About Bank Lending Practices

The Federal Reserve has to keep tabs on the current state of the U.S. economy—specifically, whether it is expanding or contracting. Here’s how it works:

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Loose lending policies:

When lending policies are relatively loose, credit is easy to obtain, and companies and individuals can borrow money at relatively low cost, the economy tends to expand.

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Tight lending policies:

When lending policies are relatively tight, credit is difficult to obtain, and companies and individuals cannot borrow money without paying a high price, the economy tends to contract.

Knowing whether lending policies are tight or loose and looking at other factors affecting growth in the U.S. economy, the Federal Reserve can make better informed decisions on what it should do with its monetary policy.