June 22, 2000


Enclosed is an article in the latest issue of the New York Fed’s Economic Policy Review, Listening to Loan Officers: The Impact of Commercial Credit Standards on Lending and Output.

The Federal Reserve’s Senior Loan Officer Opinion Survey is a useful tool for predicting commercial loan growth and overall economic activity, according to authors Cara Lown, Donald Morgan, and Sonali Rohatgi.

Once each quarter, loan officers at roughly sixty large U.S. banks are asked about their moves to tighten or ease commercial credit standards since the previous quarter. The responses help the Federal Reserve to determine whether bankers are growing more or less cautious in their lending practices.

Although the survey has been in use on and off since 1967, the authors note that its small sample size, the qualitative nature of its questions, and potential reporting bias among respondents could lead one to question the survey’s usefulness.

Despite these potential drawbacks, Lown, Morgan, and Rohatgi find the survey informative. Changes that the survey reports help to predict both commercial bank lending and GDP, even after controlling for past economic conditions and interest rates.

According to Lown, Morgan, and Rohatgi, the survey also shows that:

  • There is a strong connection between loan officers’ reports of tighter credit standards and slowdowns in commercial lending and output.
  • Reported changes in credit standards help predict narrower measures of business activity as well, such as inventory investment and industrial production.
  • The chain of events following a "shock to credit" standards resembles a "credit crunch": commercial loans plummet, output falls, and the federal funds rate is lowered.

Cara Lown is a research officer, Donald Morgan is an economist, and Sonali Rohatgi is an assistant economist at the New York Fed.

Contact: Douglas Tillett

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