While the incessant drumbeat that “banks aren’t lending” continues, the real story once again is that demand for loans continues to drop. Please consider the January 2010 Senior Loan Officer Opinion Survey on Bank Lending Practices.

The January survey indicated that commercial banks generally ceased tightening standards on many loan types in the fourth quarter of last year but have yet to unwind the considerable tightening that has occurred over the past two years. The net percentages of banks reporting tighter loan terms continued to trend lower. Banks reported that loan demand from both businesses and households weakened further, on net, over the survey period.

For many major loan categories covered by the survey, the net percentages of respondents that tightened standards in the fourth quarter of 2009 were close to zero. However, banks continued to tighten a number of terms on loans to both businesses and households, although the net fractions of banks that reported doing so in the January survey generally stepped down again. Banks’ policies on CRE lending were an exception, as large net fractions of respondents further tightened their credit standards during the final quarter of last year. In addition, banks reported that they had tightened terms on CRE loans substantially over the past year.

Demand from both businesses and households for all major categories of loans weakened further, on net, over the past three months. The net fractions of banks that reported weaker demand for business loans continued to decline, while changes in the comparable readings on demand for loans to households were mixed.

Other than Commercial Real Estate, which is plagued by vacancies and falling rents, there was no change in lending standards. With that fact in mind, let’s once again investigate the charge “banks aren’t lending”.

Here is the survey question on page 23: “4. Apart from normal seasonal variation, how has demand for C&I; loans changed over the past three months?” followed by the table of responses.

Demand for C&I; loans from large and middle-market firms

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Demand for C&I; loans from small firms (annual sales of less than $50 million)

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Please look at that last chart carefully. It represents demand for small business loans (firms with annual sales of less than $50 million).

Across all banks, demand for loans was modestly weaker by 31.5 percent of respondents and substantially weaker at 1.9% of respondents. Demand for small business loans was modestly stronger at only 3.7 percent of banks and substantially stronger nowhere.

Tightening Credit Standards Are Not The Reason For Weakening Demand

Here is the question on page 53: “Over the past three months, how have your bank’s credit standards for approving applications for C&I; loans or credit lines—other than those to be used to finance mergers and acquisitions—changed?

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Thus, once again, a quick look at the data shows that it makes no sense to blame banks for not making small business loans. Demand for loans is down and most likely demand from qualified applicants is down even more.

As I pointed out in Fictional Reserve Lending And The Myth Of Excess Reserves

  • Banks are capital constrained not reserve constrained.
  • Banks aren’t lending because there are few credit worthy borrowers worth the risk.

I maintain that banks are lending responsibly for the first time in a decade. This is a good thing!

Mike “Mish” Shedlock
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