Credit Standards Loosen Again


Today the Federal Reserve released the results of the October Senior Loan Officer Opinion Survey.  While credit standards remain tight from a historical perspective (especially considering the dearth of loan demand), lenders report that they continue to loosen standards.  However, the pace of loosening has slowed from prior months.  The charts tell the story:


Overall, standards were looser, spreads were tighter, and loan demand was once again lighter.  This generally matches what we are hearing anecdotally from bankers, as loan demand continues to be awful, with banks adjusting price and standards in an effort to keep portfolios from shrinking

The reality is that banks everywhere are desperate for yield, and many are making decisions about where to stretch to get yield.  The basic question is, should we stretch on credit risk or on interest rate risk?  Either way, make sure you are quantifying the risk vs reward, and make sure you are not taking BOTH risks.  And, for what its worth, while the yield curve has flattened considerably, I still think there is a better return for your risk by adding incremental interest rate risk instead of adding incremental credit risk.  Let us know if we can help with this thought process - the conversations are free.