The recent declines in tightening of lending standards suggest that business lending may be poised for a rebound.Bank loans ; Commercial loans

David C. Wheelock

English

Research Papers in Economics

Economic SYNOPSES
short essays and reports on the economic issues of the day
2010 ■ Number 8
B
ank loans to businesses typically fall during reces-
sions and for a few months after recessions end.
True to form, commercial and industrial (C&I) loans
by commercial banks fell sharply during the recent reces-
sion and dropped by more than 10 percent in the second
half of 2009, despite an upturn in gross domestic product
(GDP) growth. The decline in C&I loans in the second half
of 2009 was larger than in any six-month period following
a business cycle trough since World War II.
Much of the recent decline in bank lending undoubtedly
reflects the economic contraction, which by some measures
was the most severe since World War II. Loan demand falls
during recessions, and banks tend to tighten lending stan-
dards, which reduces loan supply. The Federal Reserve sur-
veys banks quarterly to obtain information about changes
in loan demand and lending stan-
dards.1 Information from the sur-
veys is useful in forecasting changes
in loan volume and GDP.2 The net
percentage of surveyed domestic
banks that reported tightening of
lending standards from the previ-
ous quarter peaked in 2008:Q4 at
83.6 percent for loans to large- and
medium-sized firms and 74.5 per-
cent for loans to small firms. The
chart shows that the net percentage
of banks that tightened standards
for C&I loans also peaked during
recessions in 1990-91 and 2000-01.
The percentage of respondents
reporting tighter standards has
declined in recent surveys. In the
January 2010 survey, no banks
reported tighter standards on loans
to large- and medium-sized firms,
while 5.5 percent reported that they
had eased terms somewhat. This
was the first survey by the Fed that
reported a net percentage of banks
easing terms for loans to large- and
medium-sized firms since 2007:Q2. Although 3.7 percent
of responding banks indicated tightening of standards for
loans to small firms, this was the lowest percentage since
2007:Q2. 
Whereas the recession and the accompanying decline
in loan demand undoubtedly explain much of the decline
in business lending, surging delinquencies and loan losses
When Will Business Lending Pick Up?
David C. Wheelock, Vice President and Banking and Financial Markets Adviser
The recent declines in tightening 
of lending standards suggest 
that business lending may be 
poised for a rebound.
–40
–20
0
20
40
60
80
100
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Net Percentage of Domestic Respondents Tightening Standards for 
Commercial and Industrial Loans 
Loans to Large- and Medium-Sized Firms
Loans to Small Firms
NOTE: Gray bars indicate recessions as determined by the National Bureau of Economic Research. 
The current recession end date of 2009:Q2 is used for illustrative purposes.also likely contributed to the decline during the recession
and early months of the recovery. Loan losses erode bank
capital, which leaves banks less able or willing to extend
new loans, and banks respond to rising business failures
and declines in their own capital-to-assets ratios by tight-
ening lending standards (Lown and Morgan, 2006). The
January survey found current and prospective delinquency
rates on C&I loans to small businesses were higher than
those to large- and medium-sized firms. Thus, even though
few respondents reported tightening of lending standards,
the outlook for a significant increase in loan supply, espe-
cially for small firms, is clouded by a substantial overhang
of delinquencies and possible losses on outstanding loans.
Nonetheless, given the good track record of the survey in
forecasting loan volume and GDP growth, the recent
declines in tightening of standards suggest that business
lending may be poised for a rebound. ■
1 January 2010 Senior Loan Officer Opinion Survey on Bank Lending Practices
(www.federalreserve.gov/boarddocs/SnLoanSurvey/201002/default.htm).
2 See Lown, Cara and Donald P. Morgan. “The Credit Cycle and the Business
Cycle: New Findings Using the Loan Officer Opinion Survey.” Journal of Money,
Credit, and Banking, September 2006, 38(6), pp. 1575-97.
Economic SYNOPSES Federal Reserve Bank of St. Louis      2
research.stlouisfed.org
Posted on March 30, 2010
Views expressed do not necessarily reflect official positions of the Federal Reserve System.

When will business lending pick up?

http://research.stlouisfed.org/publications/es/10/ES1008.pdf

When will business lending pick up?

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