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Economy in Brief

Credit Standards Eased as Demand Fell  
by Tom Moeller November 10, 2006

In the 4Q Senior Loan Officer Survey on Bank Lending Practices, the Federal Reserve Board indicated that credit standards for large firms were unchanged during the last three months. That represented a sharp easing of lending conditions relative to the stringency of one year ago.

The easing came as the strength in the demand for C&I loans waned substantially. Amongst large firms, 14.5% reported stronger loan demand but 18.2% reported either a moderately or substantially weaker call for credit. The net -3.7% was the weakest in three years.

Amongst small firms, bank lending standards similarly eased to the least stringent in three years. However, loan demand here too fell sharply. In fact, the collapse to a net -13.0% reporting stronger demand reflected nearly one quarter of banks reporting at least moderately weaker demand.

For individuals, loan demand for mortgages virtually dried up. The net -60.4% of banks reporting either moderately or substantially weaker mortgage loan demand was the worst since during the recession year of 2000. In contrast to the situation for businesses, the tightening of lending standards for mortgage loans to individuals was to the most stringent since 2004 and was in marked contrast to 3Q06 when standards were near the easiest since 1993.

Banks' willingness to lend to consumers also dried up. The net 1.9% of banks still willing to lend to consumers was the lowest since early 2003.

Some worry about M&A related loan activity was reflected in a net 26.9% of banks expecting loan quality to deteriorate either somewhat or substantially over the next twelve months. There were no banks that expected loan quality to improve. For loans unrelated to M&A activity, there was a similarly negligible 1.9% of banks that expected loan quality to improve at least somewhat and 36.5% expected at least some deterioration.

The figures behind the Fed survey of lending practices can be found in the Haver SURVEYS database.

The October 2006 Senior Loan Officer Opinion Survey on Bank Lending Practices from the Federal Reserve Board is available here.

Monetary Aggregates and Monetary Policy at the Federal Reserve: A Historical Perspective, today's speech by Fed Chairman Ben S. Bernanke can be found here.

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