Banks Aren’t Keen To Lend. Businesses Don’t Want To Borrow.

The senior loan officer opinion survey (or “SLOOS”) is a quarterly review conducted by the Federal Reserve, revealing how easily – or not so easily – banks are lending money to folks and firms. The chart above shows the proportion of banks reporting that they’ve tightened their lending standards to commercial and industrial customers, according to results of the October survey published this week. (The figures are calculated as net percentages, or the share of banks reporting tighter conditions minus the proportion of banks reporting easier standards). When the line goes up, as it’s been doing since the start of 2022, it means banks are becoming more cautious about dishing out business loans.

Now, the bad news is that according to the latest survey, US banks broadly reported tight lending standards and weak demand for loans from July to September of this year. But the good news is that both measures improved somewhat compared with the prior three-month period. More specifically, the net proportion of banks tightening their standards on commercial and industrial loans for medium and large businesses fell to 33.9%, from 50.8%. In terms of why banks are still tightening lending standards, they most frequently cited a less favorable or more uncertain economic outlook, reduced tolerance for risk, a deterioration in the credit quality of loans and collateral values, and concerns about funding costs.

Despite the quarter-over-quarter improvement, the numbers are still pretty dire and do little to dispel fears about a looming credit crunch – especially after the turmoil in the banking sector earlier this year. Credit, after all, is the lifeblood of the economy: when it gets harder to borrow, consumers spend less and businesses invest less, hobbling economic growth and increasing the odds of a recession.

You can see that starting to happen, in this next chart, from Goldman Sachs. The blue line plots the results of the SLOOS survey through the years – specifically, the net percentage of loan managers who said they’d tightened their credit standards for commercial and industrial customers. The red line shows actual bank lending four quarters in the future. When the red line goes up, it means bank lending fell, with the gray-shaded areas indicating recessions. Importantly, you can see that the red line shoots higher during all the shaded gray areas. Here’s what that means: when the SLOOS survey indicates that banks are turning more cautious in their lending practices, it often precedes a decrease in actual lending in the future – a harbinger of a recession.

The relationship between banks’ reported lending practices, actual lending four quarters later, and economic recessions. Source: Goldman Sachs.