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Bank lending standards and loan growth

Monitoring lending activity in troubled times

One of the many serious concerns about the ongoing coronavirus pandemic is that affected firms will find it difficult to continue to pay interest and principal on their outstanding bank loans, while many firms will require additional loans to tide them over until normal levels of economic activity resume. It’s likely banks will want to help their customers weather the downturn, but some might be reluctant or incapable of extending a large volume of new loans, particularly when the specter of a possible, perhaps likely, recession looms.

A reliable indicator of the willingness of banks to make loans is the Fed’s quarterly Senior Loan Officer Opinion Survey on Bank Lending Practices. Researchers find that bank lending tends to slow after an increase in the percentage of banks that are tightening lending standards. The FRED graph plots the compound annual rate of change in commercial and industrial loans alongside the net percentage of banks tightening standards for such loans to large and middle-market firms.

As the grapht shows, loan growth tends to slow (increase) following an increase (decline) in the net percentage of banks reporting a tightening of lending standards. Moreover, substantial net tightening of standards occurred before and during recessions in 2001 and 2008-09. As of January 2020 (the most recent survey month), the net percentage of banks reporting a tightening of standards was close to zero. In recent weeks, the Federal Reserve has taken several actions to encourage banks to continue to lend to businesses and households during the pandemic event. The net percentage of banks reporting a tightening of lending standards in upcoming surveys will likely be a good indicator of how strong lending will be through the remainder of 2020 and into 2021.

How this graph was created: Search for and select “Net Percentage of Domestic Banks Tightening Standards for Commercial and Industrial Loans to Large and Middle-Market Firms” (FRED series ID DRTSCILM). From the “Edit Graph” panel, use the “Add Line” feature to search for and select the “Commercial and Industrial Loans, All Commercial Banks” series (FRED series ID TOTCI). From the “Edit Line 2” tab, modify units to “Compounded Annual Rate of Change” and frequency to “Quarterly.” Then, from the “Format” tab, change “Line 2 Y-Axis position” to “Right.” Finally, adjust the sample period to a time when both series are available.

Suggested by Qiuhan Sun and David Wheelock.

View on FRED, series used in this post: DRTSCILM, TOTCI


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