Why is lending not increasing if the recession is over?

Previous recessions have shown that it typically takes 13 months after the recession for business confidence to return and credit to return to pre-recession levels. This is because the risk of lending in the current economic environment is much greater today than several years ago when the economy was much stronger. Banks are actively looking for lending opportunities. Business confidence is down, however, and many businesses either do not want to take on additional debt or are not in a position to do so given weak sales. Consequently, loan demand has fallen dramatically since the start of the recession.

Because of the increased risks, credit terms are different in this environment, with higher downpayments required. In addition, loans tend to be smaller, which is consistent with diminished collateral values. These are prudent business practices and ones bank regulators expect. But it means that some projects that might have been funded when the economy was stronger may not find funding today. The NFIB recognized this, stating, “[T]he continued poor earnings and sales performance has weakened the credit worthiness of many potential borrowers. This has resulted in tougher terms and higher loan rejection rates (even with no change in lending standards).” [NFIB Small Business Economic Trends, November 2009. National Federation of Independent Business.]