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:
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: