This post is a guest contribution by Asha Bangalore* of The Northern Trust Company.

The main aspect that stands out in the October 2009 Senior Loan Officer Opinion Survey is that lending conditions were less tight than survey results of July 2009 indicated and there was a substantial improvement from the October 2008 survey when credit markets had frozen. The net fraction of banks that reported tightening standards on commercial and industrial (C&I) loans for large firms dropped to 14% during October from 31.5% in July and was noticeably below the peak of 83.6% reported in January 2009 (see chart 1). A similar reduction in the number of banks reporting tightening lending standards was reported for C&I loans to small firms (see chart 1).

However, demand for C&I loans continued

The Federal Reserve Board’s Senior Loan Officer Opinion Survey has just been published. This is an important document for assessing to what extent credit markets are thawing and confidence is returning to the financial system. The analysis below is a guest contribution by Asha G Bangalore* of The Northern Trust Company.

The latest Senior Loan Officer Survey reports a small but notable easing of loan underwriting standards but demand for loans was weak with the exception of residential mortgages. The number of banks tightening underwriting standards for commercial and industrial (C&I) loans to large firms was smaller in July (30%) compared with the results of the April survey (40%); the peak was a little over 80% of bankers reporting strict terms for borrowing in the fourth quarter of 2008 (see chart 1).

The Federal Reserve Board’s Senior Loan Officer Opinion Survey is due to be published on August 17. This is an important document for assessing to what extent credit markets are thawing and confidence is returning to the financial system.

In the meantime, the European Central Bank’s Euro Area Bank Lending Survey has just been published. The net percentage of banks reporting a tightening of credit standards for loans to firms more than halved to 21% in the second quarter of 2009 from 43% in the first quarter - down from a peak of more than 60% in the third and fourth quarters of 2008.

As one would expect, there is a strong correlation between the lending standards in the US and Europe, as shown in the graph below. Based on the historical relationship it seems likely that the number of US loan officers reporting a tightening of