Senior Loan Officer Survey shows noteworthy improvements

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This post is a guest contribution by Asha Bangalore, vice president and senior economist of The Northern Trust  Company.

The latest Senior Loan Officer Survey indicates that banks have lowered underwriting standards and eased lending terms for commercial and industrial loans since the April survey. These favorable conditions have been available to large and medium firms for three quarters; the latest survey results indicate a further improvement on the supply side of credit for large firms.

More importantly, banks have eased standards of underwriting for small firms, this is the first survey showing a desirable unwinding of tightening conditions for small firms since the fourth quarter of 2006 (see chart 2).

On the demand side, a few bankers reported an increase in demand large firms (see chart 3), the first since the second quarter of 2006. With regard to small firms, a small percentage continue to indicate weak demand for loans, while the majority indicated no change in demand for loans.

In the commercial real estate sector, demand for loans and underwriting standard were largely unchanged from the April survey.

Banks relaxed standards for residential mortgages, particularly prime mortgages in the last three months and banks also indicated an increase in demand for prime mortgages (see chart 5).

Bankers showed an increased willingness to lend to households in the July survey compared with the April survey. In addition, banks were less strict about underwriting standards for consumer loans excluding credit cards in July. In sum, bankers have changed the credit situation in favor of households.

Did consumers respond favorably to the more appealing credit environment? The survey results indicate that demand was less negative in the latest survey compared with the results of the April survey (see chart 7).

Latest data pertaining to bank loans shows a less severe credit crunch in July compared with the earlier part of the year (see chart 8). Consumer loans show a small increase, while commercial and industrial are closer to zero and real estate loans show the relatively more troubling situation.

Source: Asha Bangalore, Northern Trust, Daily Global Commentary, August 16, 2010.

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