Fernando de Querol Cumbrera
Research expert covering construction, loans, leasing, savings, and debt
Bank lending during recessions - statistics & facts
During economic recessions the volume of new loans granted generally decreases or slows its growth. There are several factors that play into this. Demand for loans tends to be lower during times of economic uncertainty. The worry about layoffs, unemployment, and reduced disposable income makes consumers more prone to save their money. Companies also tend to be more conservative with their spending if they are unsure about their growth expectations. On the supply-side, banks usually provide less loans and focus instead on less riskier assets such as government bonds. For example, over a third of loan applications by Greek SMEs were rejected in 2011, during the economic crisis that started in 2007, a much higher rate than in 2019.
Lending trends during U.S. recessions
Both the recession caused by the 2007 financial crisis, as well as the economic contraction that began with the outbreak of COVID-19 in 2020, are reflected in the volume of loans and leases provided by commercial banks in the United States. The amount of new credit provided was 16 percent lower in September 2009 and June 2020 than in the previous year. Nevertheless, there are differences in the effects of each downturn on bank lending. From March to April 2020, the demand for business loans in the United States actually soared, as companies needed funding to withstand the effects of the pandemic. However, after the initial shock, the growth rates of business lending remained negative throughout 2020 and early 2021. Yet another difference: after the 2007 financial crisis, lending stagnated for a longer time than during the coronavirus pandemic. Although some warning signs for the next U.S. recession have appeared in 2022, the volume of new credit has kept rising throughout the year.What type of loans are most affected by recessions?
Credit with a higher associated risk tends to decrease more during economic downturns. Therefore, the value of car loans in the U.S. with a risk score under 620 fell more sharply from 2007 to 2009 than those with a risk score of over 760. Secondly, not all types of loans have the same volatility. During the recessions that started in 2007 and 2020, the annual growth rates of consumer loans in the UK were much lower than that of mortgages. This disparity was even larger during the COVID-19 pandemic, which had a strong impact on consumer spending due to the implementation of lockdowns and other measures against the spread of the virus. Lastly, the growth rates of consumer loans in southern Europe and other countries whose economies contracted the most, were much lower than the average for the eurozone. That would show that bank lending decreases the most in those countries whose economies are most exposed.
