Lending Standards

Overview

Lending standards serve as an indicator of financial health. The metric used to measure tightening standards is the “Net Percentage of Domestic Banks Tightening Standards for Commercial and Industrial Loans to Large and Middle-Market Firms” (DRTSCILM).

This indicator reflects what percentage of banks are making their loan approval criteria more stringent.

Key Dynamics

When this percentage increases, it signals a more defensive posture among banks. As financial institutions tighten credit access, they’re essentially expressing concern about mounting economic risks. This restriction on financing can constrain consumer spending, business investment, and ultimately economic growth.

Recession Signal

Tightening lending standards frequently precede recessions as an early warning mechanism. While there’s no magic threshold, historical patterns show that whenever this metric has exceeded 15% in recent decades, a recession has followed.

Tracking the Metric

For better visualisation, add the US recessions indicator (displayed as green boxes) and draw a horizontal reference line around the 15% level to identify potential warning signals.