Bank Lending to Businesses Business loans flattened prior to the last recession before falling substantially, even in nominal terms. However, since 1994 loan growth has remained high, reflecting both favorable banking conditions and strong economic growth. Looking more closely at last year and January 2001, the weekly data on business loans show continued strong growth. Given the tightening of loan standards, together with weaker demand for loans to finance capital expenditures or mergers and acquisitions, the continued increase in lending activity most likely reflects a shortage of internally generated funds at businesses and an increased need for inventory financing. In addition, some businesses have responded to tightness in the securities markets by switching to bank loans.
Banks obviously like to see their loans repaid.
As a result, they may be willing to help borrowers through bad times, if doing so will prevent writing off loans. In addition, the value of borrower relationships may prompt banks to renew maturing loans, even when the condition of borrowers has temporarily worsened. These considerations suggest banks may provide more of a cushion to borrowers than the media stories would lead one to believe. Conclusion Nobody doubts the economy has entered a significant correction. The suddenness of the slowdown is cause for concern.