The recently released Federal Reserve’s survey of senior loan officers showed a tentative improvement of credit conditions during 4Q09, with a smaller proportion of banks tightening standards and demand improving across C&I and CRE loan types, but demand remaining weak for Residential Real Estate and Consumer loans (quotes from the Report in italics):

The January survey indicated that commercial banks generally ceased tightening standards on many loan types in the fourth quarter of last year but have yet to unwind the considerable tightening that has occurred over the past two years. The net percentages of banks reporting tighter loan terms continued to trend lower.  Banks reported that loan demand from both businesses and households weakened further, on net, over the survey period.

Details within the report are instructive with regard to loan demand and credit availability.

Large banks are lending more freely than small ones

• Some of the largest domestic banks (those with assets greater than $20 billion) reported having eased loan terms to large and middle-market firms, particularly terms pertaining to loan maturities and loan spreads.
• Moderate net percentages of smaller domestic bank respondents (those with total assets below $20 billion) continued to tighten terms on loans to firms of all sizes.

Loans to small businesses are still harder to obtain than loans for larger companies

• The net fractions of domestic banks that tightened terms on loans to small firms were generally a little larger than the net fractions that tightened terms on loans to large and middle-market firms.

Demand for commercial loans continued to weaken, as did the supply of credit for commercial and residential real estate

• Demand for C&I loans from firms of all sizes weakened further, on net, over the past three months.
• Large net fractions of both domestic and foreign institutions again reported having tightened a range of terms on CRE loans over the
  course of 2009.
• Banks continued to tighten standards on residential real estate loans over the past three months.

Importantly, however, credit availability to consumers increased

• A small net fraction of banks reported an increased willingness to make consumer installment loans.

The Report belies the notion that banks lent blindly in the face of mounting credit problems in the run up to the Lehman collapse, and that they have refused to lend as the economy struggles to regain its footing.  The graphs support the idea that demand remains weak and credit availability is not uniform, but on balance the credit situation is improving. This in turn suggests that, in the near term, inflation will not become a problem. Should the trend continue the Fed may be forced into executing its “exit strategy” however. 

We’ll be watching this Report closely for signs of inflationary pressures building.

(graphs: Federal Reserve Board)