Bank Credit Standards: The Tightening Is Over

Banks have pretty much stopped tightening credit standards, but that doesn't mean they are easing–maybe not, at least.  The chart below is based on the Federal Reserve's Survey of Senior Loan Officers.  The question asked is whether they tightened or eased credit standards.   The chart shows "net percent," which is the percent who said that tightened minus the percent who said they eased.

Bank Survey

In this survey, as in recent surveys, no one said he had eased.  It's all tightening or staying the same.  Nonetheless, the chart clearly shows the worst of the tightening is over.  Also note how few banks ever admit to easing credit standards.  We know credit was eased tremendously in the mid 2000s, but that hardly shows up in the chart.  Talking about tightening makes better conversation with one's regulators.

Unfortunately, the data don't allow us to calibrate where we stand now compared to, say, 2003.  We know that a lot of tightening was justified to get past the easy credit of the boom, but it is hard to say whether the banks have gone overboard and over-tightened.  Maybe, or maybe they've just returned to a moderate stance.

The other issue that we don't fully understand: when banks say they have tightened credit standards, to what extent are they merely reporting that nobody meets even the old standards?  Remember that most bank loans are real estate related.  A bank that kept its lending standards unchanged might very well be making few loans today, because so few real estate development projects pencil out.

What does this mean for borrowers?  First, run more cash flow projections than you ever have before.  Consider a second drop in sales, consider a moderate increase in sales, and a major increase in sales.  Get an idea for which scenarios put you short of cash.  (Hint: you may run short of cash if sales fall, or if sales rise sharply.)  Second, talk to your banker early about potential cash needs.  It's never good to surprise him or her.  If your banker will not be able to help you, start looking at alternatives real soon.