Best Financial Markets Analysis Article The Fed's Senior Loan Officer Survey results of October indicate that demand for commercial and industrial loans from large and medium sized firms was weaker compared with the third quarter survey (see chart 1). A larger percentage of bankers indicated weaker demand from small firms. This information is discouraging because stronger economic growth in the months ahead is tied to a likely pickup in loan demand.

Reduced financing needs for inventories and accounts receivables, decline in investment of plant and equipment, and an increase in internal funds were the reasons cited for a lack of loan demand. At the same time, underwriting standards for loans to medium and large firms were eased in October, marking the fourth consecutive quarter of easing standards. Bankers had relaxed standards for small firms for the second consecutive quarter (see chart 2). Bankers noted that a "more favorable or less uncertain economic outlook and increased competition from other banks and non-banker lenders" had led to this more favorable environment of underwriting standards.

On the household side, a small fraction of bankers had tightened standards on both prime and nontraditional mortgage loans, with smaller banks accounting for the tightening of standards for prime mortgage loans. Both large and small banks indicated they tightened underwriting standards for nontraditional loans. In addition, a "modest fraction of banks" reported stricter rules for HELOCs over the past three months, with largely small banks reporting this trend.

Demand for consumer loans remains on the weak side (see chart 4) and the willingness to lend to consumers edged down to 20% in the fourth quarter from 22.6% in the prior quarter.

Asha Bangalore — Senior Vice President and Economist

http://www.northerntrust.com
Asha Bangalore is Vice President and Economist at The Northern Trust Company, Chicago. Prior to joining the bank in 1994, she was Consultant to savings and loan institutions and commercial banks at Financial & Economic Strategies Corporation, Chicago.

The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.

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