Following the 2007–09 financial crisis, bank lending to businesses plummeted. Five years later, the dollar amount of bank commercial and industrial lending has finally surpassed the previous peak. However, despite very accommodative monetary policy and abundant excess reserves in the banking system, the spread of the commercial loan interest rates over the target federal funds rate remains above its long-run average. This suggests that business loans are not yet cheap relative to banks’ funding cost.
Bank lending to businesses dropped precipitously following the 2007–09 financial crisis, in part because banks tightened both underwriting standards and lending terms to levels not seen before. At the same time, businesses were reluctant to borrow amid anemic sales and an uncertain economic outlook. Only recently has bank commercial and industrial (C&I) lending finally surpassed the previous peak from 2009. Although thequantity of bank lending to businesses has finally recovered, what about the terms of that lending?
In this Economic Letter, I delve beyond the quantity of bank C&I lending to examine the terms of these business loans using both survey data and loan-level data. Surveys from bank lending officers report that, on balance, they have been easing C&I loans’ lending terms for several years. However, analysis using loan-level data show that, while the spread of the interest rates charged on C&I loans over the federal funds rate has been declining, it still remains above the historical average. Thus, business loans may be more available, but they are not offered at terms that are considered cheap.
Figure 1
Bank commercial and industrial lending to businesses
Note: Seasonally adjusted, weekly data.Â
Source: Federal Reserve Board, H8 release.
Bank lending since the financial crisis
For many businesses, especially smaller firms that do not have access to the capital market, bank credit is a very important source of financing. In the aftermath of the financial crisis, banks tightened both the lending standards and terms on C&I loans for many reasons, including banks’ own capital positions, loss overhang, and risk aversion, as well as the very uncertain economic outlook, which could further affect borrowers’ creditworthiness. Figure 1 shows the plunge in C&I lending between 2009 and 2010. Part of this sharp drop was due to weak demand by businesses, but a major factor was tighter underwriting standards by banks. In fact, tight credit conditions at banks have been regularly cited by policymakers as a major headwind to the economic recovery, in part contributing to the lackluster growth in the current expansion.
Fast-forward to 2014. The level of bank C&I lending has finally surpassed its 2009 peak. Nevertheless, the recovery in lending volume happened against the backdrop of several years of highly accommodative monetary policy, when the federal funds rate on which the bank lending rate is based has been near zero. At the same time, excess reserves in the banking system skyrocketed to an unprecedented level as a result of the Federal Reserve’s large-scale asset purchases. Taken together, these Fed actions were intended to boost demand by lowering the cost of borrowing, so the recent growth in C&I loans shown in Figure 1 is not unexpected.
