Senior Loan Officer Survey

[oldreliable67]

Mention has been made in several threads about loan demand, typically couched in the form of 'bank's unwillingness to lend.' The Fed's Senior Loan Officer Survey for October provides the following:

The October survey indicated that, on net, banks eased standards and terms over the previous three months on some categories of loans to households and businesses.2 Both large and other domestic banks reported having eased some standards and terms; large banks were primarily responsible for the easing reported in July.3 However, substantial fractions of banks reported in response to a set of special questions that standards for many categories of loans would not return to their longer-run averages for the foreseeable future.

Domestic survey respondents reported easing standards and most terms on C&I loans to firms of all sizes. As in the April and July surveys, banks mainly pointed to a more favorable or less uncertain economic outlook and increased competition from other banks or nonbank lenders as reasons for easing. Of the few banks that reported having tightened standards or terms, all reported a reduced tolerance for risk as being partly responsible for the tightening.

Changes in standards and terms on loans to households were somewhat more mixed. Banks again reported an increased willingness to make consumer installment loans, and a small net fraction of respondents reported easing standards for approving credit card applications. However, a few banks, on net, reported having tightened terms and reduced the size of credit lines on existing credit card accounts. Small net fractions of respondents--though not the largest respondents--also reported having tightened standards on prime and on nontraditional mortgage loans as well as standards for approving home equity lines of credit (HELOCs).

Demand declined, on net, for C&I loans, particularly for small firms; demand for C&I loans had been unchanged in the July survey.4 Large banks reported increased demand for commercial real estate (CRE) loans, but demand weakened at other banks. In addition, small net fractions of banks reported decreased demand for all types of residential mortgages and consumer loans, though the weakness was primarily at smaller institutions.

The 'somewhat eased standards' reported by survey participants is most likely reflected in the modest increases seen in recent weeks in C&I Loans by large commercial banks, noted here.

If banks have eased standards and at the same time, loan demand has picket up, what does that say about the recovery?

 

[Kushinator]

Given the state of the consumer, i would believe this uptick in lending activity represents increased business investment (of course the chart does state commercial and industrial). The first thing to recover during is private business investment. This translates into increased hiring which manifests into a "multiplier effect" allowing for further labor market recovery.

Something to note:

The Federal Reserve Bank of New York today released its Quarterly Report on Household Debt and Credit for the third quarter of 2010, which shows that consumer debt continues its downward trend of the previous seven quarters, though the pace of decline has slowed recently. Since its peak in the third quarter of 2008, nearly
$1 trillion has been shaved from outstanding consumer debts.

Additionally, this quarter’s supplemental report addresses for the first time the question of how this decline has been achieved and notes a sharp reversal in household cash flow from debt, indicating a decrease in available funds for consumption. According to newly available data through year end 2009, the payoff of debt by consumers reduced their cash flow by about $150 billion, whereas between 2000 and 2007, borrowing had contributed more than $300 billion annually to consumers’ cash flow.

source

 

[oldreliable67]

Given the state of the consumer, i would believe this uptick in lending activity represents increased business investment

I suspect the improvement in C&I Loans at Large Banks reflects some involuntary inventory accumulation over the last few months. We have seen inventories add 1.64 percentage points to GDP in the Q3 advance estimate, after contributing quite a lot to Q1 and Q2 as well. Inventory/Sales ratios have ticked up. In a relatively slow growth economy, at least a portion of that accumulation strikes me as likely being involuntary, and thus financed largely by short-term bank credit.

 

[Ahlevah]

If banks have eased standards and at the same time, loan demand has picket up, what does that say about the recovery?

I noticed a couple things. Your graph is a bit deceiving in the sense that it doesn't show an increase in lending. Rather, it shows a drop in the rate of decline of lending for large commercial banks. If you look at a graph for the total of such loans at all commercial banks, you get a different picture:


http://research.stlouisfed.org/fred...tage_date=2010-11-09&revision_date=2010-11-09


Maybe banks eased standards and the decline is flattening, but credit continues to decline, something that's a bit troubling at this point in the "recovery." The key going forward will be, I think, what it's been all along: real estate. About 2/3rds of banks' loan book is in commercial and residential mortgages, and I have yet to see any real evidence that real estate is not still deflating. Until that happens, I'm skeptical that banks will open up their wallets on a large scale, or that consumers will go on a spending bender again any time soon.

 

[oldreliable67]

I noticed a couple things. Your graph is a bit deceiving in the sense that it doesn't show an increase in lending. Rather, it shows a drop in the rate of decline of lending for large commercial banks. If you look at a graph for the total of such loans at all commercial banks, you get a different picture:

The long time frame depicted in the graph makes it difficult to see the recent apparent small improvements in C&I loans. It is more evident in the following shorter-term graph:

About 2/3rds of banks' loan book is in commercial and residential mortgages, and I have yet to see any real evidence that real estate is not still deflating. Until that happens, I'm skeptical that banks will open up their wallets on a large scale, or that consumers will go on a spending bender again any time soon.

Agree with your views on real estate, but must point out that most banks have by now fully reserved for expected future real estate loan losses. In fact, there is some discussion among analysts that some may have over-reserved, hence the reduction in reserves reported by some banks in the most recent quarter which added to their earnings.

Also agree with your views re: consumers going on a 'spending bender' any time soon. While upper income bracket consumers seem to be picking up, until employment begins to grow and real estate shows solid evidence of halting its slide, overall consumption growth is likely to be quite modest.

Note, however, that a pickup in C&I loan demand at the largest reporting banks is often a precursor to a pickup in hiring. The qualification 'often' is appropriate in that sometimes the pickup in loan demand is for involuntary inventory accumulation rather than the initial stages of plant & equipment expansion. As of this moment, it is difficult to conclude exactly which is currently taking place: P&E expenditures have been increasing at a rapid clip in recent quarters, but mostly in productivity enhancing areas rather than physical facilities; meantime, inventory/sales ratios have begun to edge up. Of course, it is probably some of each, but the balance between the two remains to be seen.

 

[oldreliable67]

Further to my last post: Census reported Monthly Wholesale Trade data for Sep this morning. Inventory-to-Sales ratio increased to 1.18 from 1.17 in Aug. This continues the steady succession of increases in inventories relative to sales at the wholesale level: after bottoming at 1.13 in April, the ratio has moved to 1.14 (May), 1.15 (Jun), 1.16 (Jul) and the aforementioned 1.17 and 1.18 in Aug and Sep respectively. Not huge moves individually, but cumulatively becoming significant.