The Federal Reserve Board’s Senior Loan Officer Opinion Survey has just been published. This is an important document for assessing to what extent credit markets are thawing and confidence is returning to the financial system. The analysis below is a guest contribution by Asha Bangalore*, vice president and economist at The Northern Trust Company.
The number of loan officers reporting a tightening of underwriting standards for commercial and industrial loans in the April survey was significantly smaller for large firms (39.6% vs. peak of 83.6% in the fourth quarter) and small firms (42.3% vs. peak of 74.5% in the fourth quarter) compared with the February survey and the peak readings of the fourth quarter of 2008 (see chart 1).
At the same time, the cost of borrowing for both small and large firms declined in the April survey from the peak in the fourth quarter of 2008.
Although the terms of loans eased in the recent months, the demand for loans remained weak (see chart 3), reflecting the massive liquidation of inventories that is underway. In particular, the demand for loans was essentially unchanged at a weak level for large firms but was weaker with respect to demand from small firms (see chart 3).
The commercial real estate sector is mired with problems. The demand for loans is noticeably weak and loan underwriting standards for commercial real estate have eased only slightly (see chart 4).
In the household sector, the demand for prime mortgage loans posted a jump (see chart 5), while that of non-traditional mortgages was less weak in the latest survey compared with the February survey.
At the same time, mortgage underwriting standards were tighter for both prime and non-traditional mortgages in the April survey compared with the February survey. In other words, more needs to done here to revive home sales.
Loan officers had reduced the stringent conditions for non-credit card consumer loans but were nearly unchanged vis-à-vis credit cards in the latest survey compared with the previous survey.
The demand for consumer loans also improved to the extent it was less negative (see chart and at the same time fewer loan officers were less willing to extend loans to consumers (see chart 9).
Source: Asha Bangalore, Northern Trust – Daily Global Commentary, May 4, 2009.
*Asha Bangalore is vice president and economist at The Northern Trust Company, Chicago. Prior to joining the bank in 1994, she was consultant to savings and loan institutions and commercial banks at Financial & Economic Strategies Corporation, Chicago.