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Posts tagged with: "DRTSCILM"

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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

Can businesses get loans these days?

A look at the state of commercial lending by banks

Businesses often need money and one way they get it is through commercial loans from banks. We gauge this environment by graphing the total mass of loans banks have made to commercial entities. Of course, the fact that the current mass of loans is the highest it’s ever been is hardly surprising: The economy is growing and loan levels aren’t adjusted for inflation, so this measure is bound to keep increasing. For this reason, we’ll deflate this indicator with a proxy for the size of the economy: nominal GDP (i.e., not real GDP).

Now we have a better way to compare commercial lending conditions over time. Things are still looking rather good right now, but consider these two caveats: 1. Businesses have other ways to finance—say, through private loans or issuing bonds or stock in equity markets. These options may change over time, which probably explains why there was an upward trend in the early decades, when this sort of financing was building up. 2. This reported loan mass shows only the results of supply and demand, but not how difficult it is to get a loan (actual supply) or how much businesses want these loans (actual demand).

To evaluate loan supply conditions, the Federal Reserve conducts a survey of loan officers, asking them whether they tightened loans conditions and for whom. The graph below shows this, with higher values indicating tighter lending conditions. It’s very clear how recessions have led bank officers to be more careful with their lending. But right now, conditions seem to be pretty good.

How these graphs were created: Top graph: Search for “commercial loans.” Middle graph: First, use the top graph. Then go to the “Edit Graph” panel to add “GDP” to the first line, making sure to use the nominal measure. Then apply formula a/b. Bottom graph: Start afresh and search for “loan standards”; select the two series you want and click on “Add to Graph.”

Suggested by Christian Zimmermann.

View on FRED, series used in this post: BUSLOANS, DRTSCILM, DRTSCIS, GDP

Business lending in recessions

Commercial business lending, especially to small businesses, took a long time to recover after the 2008 financial crisis. The graph above shows annual commercial and industrial loan growth over the past three recessions, with each series indexed to 100 at the peak before the recession. The green line represents the most recent recession: Compared with the other series, recent C&I loan growth is much flatter in the 15th to 20th post-peak quarters.

Slow loan growth could be due to demand factors, supply factors, or a combination. One way to look at the supply side of business lending is the Senior Loan Officer Opinion Survey. This quarterly survey from the Federal Reserve Board of Governors asks loan officers whether lending standards and loan officer perceptions of demand have changed over the past three months. FRED has the data, which are compiled into diffusion indexes. The graph below shows the net percent of loan officers tightening standards on C&I loans to small and large firms. Each series is indexed to 100 at the peak of the business cycle before the 1990, 2001, and 2007 recessions. The green and purple lines show that lending standards tightened much more dramatically in the most recent downturn compared with the others. Moreover, standards for small business loans tightened almost twice as much as standards for large businesses. Tightening of standards may generate a sharp reduction in loan supply, which can explain part of the tepid loan growth coming out of the 2007 recession.

How these graphs were created: Search for “commercial and industrial loans,” then add the quarterly seasonally adjusted annual rate data to a graph. Change the units to “Index (Scale value to 100 for chosen period)” and select the 1981 U.S. recession peak for the value. Then select the option to display integer periods instead of dates and make the range from 0 to 20 (five years). Add the same data series for different periods with the “Add Data Series” option, choosing the same units but selecting the other recession peaks. For the second graph, follow the same steps but search for “net percentage of domestic banks tightening,” and select the series for large and middle-market firms and then for small firms.

Suggested by Maximiliano Dvorkin and Hannah Shell

View on FRED, series used in this post: CILACBQ158SBOG, DRTSCILM, DRTSCIS

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