by Calculated Risk on 5/07/2008 06:59:00 PM

The Fed's Senior Loan Officer Opinion Survey is qualitative, not quantitative, and there has been some discussion on the predictive ability of the survey.

Luckily there was a paper written in 2000 that examined 'the value of the Senior Loan Officer Opinion Survey in predicting both lending and output'. See: Listening to Loan Officers: The Impact of Commercial Credit Standards on Lending and Output by New York Fed researchers Cara S. Lown, Donald P. Morgan, and Sonali Rohatgi.

From their conclusion:

Off and on since 1967, the Federal Reserve has surveyed loan officers at a small sample of large banks about their commercial credit standards. The idea behind the survey is that the availability of bank credit depends not just on interest rates, but on credit standards as well. Notwithstanding the small and changing sample, the checkered pattern of questions, and the sometimes curious responses of lenders, the reports are informative. The changes in standards that they report help to predict both commercial bank lending and GDP, even after controlling for past economic conditions and interest rates. Standards matter even in the 1990s, when capital markets were supposed to have eclipsed the role of banks in the economy. Changes in standards also help to predict narrower measures of business activity, where commercial credit availability from banks seems most crucial. The connection between bank standards and inventories is especially promising, because inventory investment is notoriously unpredictable and heavily bank dependent.

A shock to credit standards and its aftermath very much resemble a “credit crunch.” Loan officers tighten standards very sharply for a few quarters, but ease up only gradually: two to three years pass before standards are back to their initial level. Commercial loans at banks plummet immediately after the tightening in standards and continue to fall until lenders ease up. Output falls as well, and the federal funds rate, which we identify with the stance of monetary policy, is lowered. All in all, listening to loan officers tells us quite a lot.
emphasis added

Click on graph for larger image.

The authors provide these graphs that show the response of GDP, and in the amount of commercial and industrial loans, following a credit tightening shock. The impact on GDP is mostly within the first year, and peaks about 3 quarters after the shock.

The impact on lending lasts for a few years, and peaks about 2 years after the shock.

In the most recent tightening cycle (see graph here), there have been two tightening shocks: the first started in late 2006, and the 2nd was at the end of 2007. If the current cycle follows the normal pattern, the impact from the significant tightening at the end of 2007 should hit GDP later this year, and impact commercial loans for the next 2 to 3 years.