Wednesday, August 18, 2010

Senior Loan Officer Survey

From the Federal Reserve:

The July survey indicated that, on net, banks had eased standards and terms over the previous three months on loans in some categories, particularly those categories affected by competitive pressures from other banks or from nonbank lenders.2 While the survey results suggest that lending conditions are beginning to ease, the improvement to date has been concentrated at large domestic banks.3 Most banks reported that demand for business and consumer loans was about unchanged.

Domestic survey respondents reported having eased standards and most terms on C&I loans to firms of all sizes, a move that continues a modest unwinding of the widespread tightening that occurred over the past few years. Moreover, this is the first survey that has shown an easing of standards on C&I loans to small firms since late 2006.4 Significant net fractions of domestic banks also reported having eased their pricing of C&I loans to firms of all sizes. Banks pointed to increased competition in the market for C&I loans as an important factor behind the recent easing of terms and standards. Demand for C&I loans from large and middle-market firms and from small firms was reportedly little changed, on net, over the survey period after declining over the three months prior to the April survey.

On net, large domestic banks reported having easing standards and terms on almost all of the different categories of loans to households. Other banks showed either smaller net fractions having eased lending policies or a net tightening of lending policies. Regarding residential real estate lending, a few large banks reported having eased standards on prime mortgage loans, while a modest net fraction of the remaining banks reported having tightened standards on such loans. Banks reported an increased willingness to make consumer installment loans, on balance, for the third consecutive quarter, and small net fractions of banks reported having eased standards on both credit card and other consumer loans. By contrast, small net fractions of respondents reported having tightened the terms and conditions on credit card loans.

Here are charts of the relevant data:

While C and I lending standards area still easing, demand (the lower box) is still weak.

As with the C and I loans, standards are easing, but demand is still weak.

Note that residential demand (the lower box) is fair at best.

Most importantly, consider these charts:

Above is a chart of commercial and industrial loans outstanding plotted on a logarithmic scale. Notice that it typically contracts around recession. While the current situation is more severe, it is hardly unprecedented; in fact, it's the norm.

While real estate loans appear to be less effected by the economic cycle, they, too, have decreased around recessions as well.

Finally -- and this bears repeating -- the charts above from the Federal Reserve indicate that weak demand is just as responsible for the drop in credit that we've seen over the last few years. Banks are doing what banks typically do during recessions -- they are rebuilding their balance sheets. But we're also seeing a consumer retrenchment, which I suspect will be going on for some time. To that end, see this post from yesterday.