We've never relished taking surveys. More than the inconvenience of answering "satisfactory…wait, semi-satisfactory," what irks us is wondering how the results could get misinterpreted down the line. A great example is the recent headlines regarding the Federal Reserve Board's January 2008 Senior Loan Officer Opinion Survey:
Credit Tightens, Demand Falls
By Kelly Evans and David Enrich, The Wall Street Journal
Fed Survey Shows Banks Have Tighter Lending Standards and Weaker Loan Demand
By Dennis Moore, Forbes
Banks Raising Lending Standards, Fed Says
By Bloomberg News, Los Angeles Times
These articles imply the Fed survey portends a rapidly spreading credit crisis, increased delinquencies and losses, ratcheting standards, evaporating liquidity, and the incumbent economic decline. But was that really what the Fed survey results said? When reading reactions to surveys, Fed statements, corporate reports, anything at all, it's best to also consult the original source because much can be lost in translation.
Here's some original text from the survey on commercial and industrial (C&I) lending:
In the January survey, one-third of domestic institutions—a larger net fraction than in the October survey—reported having tightened their lending standards on C&I loans to small as well as to large and middle-market firms over the past three months.
Tightening standards! That doesn't sound good. But is that surprising to anyone, since lending institutions have recently come under such intense scrutiny? Plus, do tightened standards result in weaker demand?
On net, large domestic banks reported that demand for C&I loans from large and middle-market firms was about unchanged over the past three months, whereas about 35 percent of small domestic banks, on net, reportedly experienced weaker demand for C&I loans from these firms. About one-fourth of both large and small domestic banks, on net, also saw weaker demand for C&I loans from small firms. Finally, about 40 percent of foreign institutions reported weaker demand, on net, for C&I loans over the past three months.
So, demand was largely unchanged at larger banks, i.e., where most of the lending happens. One way to deal with survey numbers (or any data) is consider the reverse of the way they're presented. If one-third of banks have tightened standards, two-thirds did not. If 35% of small banks reported weaker demand, 65% did not. If 40% of foreign banks (with US branches) reported weaker demand, 60% did not. Puts things in a different context, doesn't it?
But the most important point is tighter standards don't seem to be holding back lending volume—we saw lending in all categories grow in Q4 2007! (See "Debt Disbelief," 01/23/2008.) And, most categories of borrowing are getting cheaper, not the reverse. Despite what you hear, we're not facing a credit crisis. Rather, we're seeing a reallocation of credit to less risky borrowers.
Note: The survey itself is not based on hard data, but loan officers' backward-looking responses to questions like, "Have you seen increased demand?" and, "Have you tightened lending standards?" With all the prevalent gloom, it's not surprising responses paint a dour picture, even in the face of positive, little-noticed news like this:
Countrywide Reports Better-than-Expected Loan Activity
By Staff, Dallas Business Journal
U.S. MBA's Mortgage Applications Index Rose 3% Last Week
By Bob Willis, Bloomberg
Mortgage Volume Rises With An Increase In Purchase Activity
By Staff, RTT News
We encourage you to read The Federal Reserve Board's January 2008 Senior Loan Officer Opinion Survey—objectively, of course.
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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.