Banks Easing Lending Terms, or Just Credit Crunch Lite?

The Federal Reserve's latest Senior Loan Officer Opinion Survey shows that more banks loosened their credit standards than tightened!  Huh?


OK, it wasn't a LOT more banks loosening than tightening.  (The chart shows the percentage who report that they tightened credit standards, minus the percentage reporting that they eased.)

Do NOT expect to see a flood of bank lending.  The credit standards don't specify whether there are many businesses that meet the new standards.  2009 was such a bad year that many companies will not be eligible for loans even at greatly relaxed lending standards.  I've spoken to many bankers as I double-check the results of my Future of Banking analysis.  One question I've asked the credit administrators is how their bank regulators feel about loans to companies that had a loss last year.  (After all, the economy was so lousy that even a well-run business could go into the red.)  The answer: regulators do not like such loans.  They demand write-offs of part of the loan value.  And banks cannot afford the loss to capital that the write-off entails (even if they believe they would eventually recover the full loan amount in a later year).  In short, bank examiners are ignoring the President of the United States, who says that he wants banks to make loans.

Further, business demand for credit will continue to be weak.  It's not just the supply of credit that fell in the recession, but also demand.  The three classic triggers for business borrowing are capital spending, accounts receivable and inventories.  All three have been weak, and will only gradually increase.  In the typical business cycle, commercial credit lags for nearly two years after the recession ends.

If you are a business that will need credit, what should you do?  I'll answer that question tomorrow.