RETURN TO ALL ARTICLES 2016, No. 2 Posted 2016-02-05 Bank Lending During Recessions by Maximiliano A. Dvorkin and Hannah G. Shell Loan growth at commercial banks decreased substantially and remained negative for almost four years after the 2007-08 financial crisis. In contrast, loan growth patterns during the 1990- 91 and 2001 recessions were more moderate. Figure 1 illustrates the evolution of the growth rate of loans and leases at commercial banks during and after the three most recent recessions. In each case, the starting period is the quarter including the official recession start date as determined by the National Bureau of Economic Research. Lending growth slowed to zero during the 1990-91 and 2001 recessions but recovered after a few quarters. In contrast, during the Great Recession (2007-09), loan growth became strongly negative and remained so for almost four years. Figure 1 Total Loans and Leases Quarter-over-Quarter Annualized Growth 20 15 10 0 - 5 -10 -.... 1990:Q3 -15 - 2001:Q1 - 2007:Q4 -20 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Quarters Since Pre-Recession Peak SOURCE: FRED" (Federal Reserve Economic Data), Federal Reserve Bank of St. Louis, and Board of Governors of the Federal Reserve System. The varying evolutions of loan growth could be due to differences in demand, supply, or a combination of both. The Senior Loan Officer Opinion Survey on Bank Lending Practices administered by the Board of Governors of the Federal Reserve System might shed some light on these differences. This quarterly survey questions loan officers at about 80 U.S. commercial banks about recent changes in lending standards and loan demand. The responses are compiled into a special type of index-a diffusion index-available in FRED (Federal Reserve Economic Data). Reports of tightening lending standards would indicate supply factors were responsible for the slowdown in loan growth, while reports of decreased loan demand would presumably indicate demand factors. Figures 2A and 2B show the net percentage of loan officers reporting tighter standards on commercial and industrial loans and revolving consumer loans (i.e., credit cards), respectively. The starting dates match those in Figure 1." As the figures show, loan officers reported a tendency to tighten lending for both business and consumer loans during all three recessions; more reported doing so during the most recent downturn. Tightening of standards reduces the loan supply and can account for part of the negative loan growth during the 2007-09 recession. Figure 2 A. Commercial and Industrial Lending Standards B. Consumer Lending Standards: Credit Cards Net Percentage of Respondents Tightening Standards Net Percentage of Respondents Tightening Standards 00 - 1990:Q3, Large Firms 80 2001:Q1 30 -. 1990:Q3, Small Firms - 2007:04 60 - 2001:Q1, Large Firms 2001:Q1, Small Firms - 2007:Q4, Large Firms -.-. 2007:Q4, Small Firms 08 8 -20 -10 -20 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 -30 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Quarters Since Pre-Recession Peak Quarters Since Pre-Recession Peak NOTE: Small firms: annual sales $50 million. SOURCE: Panel A: FRED. (Federal Reserve Economic Data), Federal Reserve Bank of St. Louis, and Board of Governors of the Federal Reserve System. Panel B: Board of Governors of the Federal Reserve System and Haver. Figures 3A and 3B show the net percentage of officers who reported stronger demand for business loans and consumer loans, respectively, during the two most recent recessions-2001 and 2007-09. On the one hand, loan officers perceived weaker demand for business loans in both recessions, with the falloff in demand appearing roughly similar (see Figure 3A). On the other hand, loan officers perceived consumer demand in the 2007-09 recession as much weaker and that weaker demand to be more protracted than in the 2001 recession (see Figure 3B). Comparison of these survey results across recessions seems to indicate that both supply and demand factors contributed to the sharp drop in bank lending during the Great Recession.4. Go to hps://fred.stlouisfed.org[ and click on the \"Publications\" tab near the top of the page. Go to Economic Synopses. On the right side of the page is a year lter. Go to 2016 and click on the link for publication 2016, No. 2, \"Bank Lending During Recessions\" a. Recessions are generally dened as periods of declining economic activity. According to the article, during which years were the last three recessions in the US? During which of these recessions did bank lending fall the most? What was distinct about this recession? (Note: This article was written before the 2020 recession.) Banks represent the supply of lending in that they are the providers of loanable funds. Why do you suppose banks would \"tighten\" their lending standards during recessions, i.e. be more careful with who is able to get a loan? Would you expect this to be more or less severe during a recession associated with a nancial crisis? Why do you suppose the demand for loans by people and businesses would decline during recessions? Would you expect this to be more or less severe during a recession associated with a nancial crisis