The Bank Lending Debate

For those who spend too much time reading economics blogs, there was a bit of a stir in the last few days over a paper by three economists at the Minneapolis Fed, which essentially said that bank lending to the real economy had not been affected by the supposed credit crisis. There were articles on the topic by Alex Tabarrok, Free Exchange, Mark Thoma, me, Tyler Cowen, Alex Tabarrok again, Free Exchange again, and Tyler Cowen again, among others. My main issue was that the charts in the paper said nothing about new lending, and my guess was that changes in new lending practices would take time to show up in measures of aggregate lending. (Other people raised more sophisticated issues, for example that companies were racing to draw down lines of credit after September 15 out of fear they might not be around for much longer.)

I want to point out one more source of information that might shed light on this question. Every quarter the Federal Reserve conducts a Senior Loan Officer Opinion Survey which asks how bank lending practices have changed over the past three months. In the July survey, every single measure of either willingness to lend or loan spreads (price of loan, less cost of funding) was at or above the tightest values (least willingness to lend, highest prices) seen in the last twenty years. Granted, these are measures of change in lending practices, but they still show a rapid shift in sentiment at banks. The October survey should be underway now, and it’s hard to see how it won’t look even worse.