When the economy begins to slow and the quality of some booked loans deteriorates, loan standards belatedly tighten and supervisors’ criticism of previous standards is taken more seriously, inducing an even greater tightening of credit. In part, the examiners’ observations have often provided a reality check by which some banks came to recognize a deterioration at first denied.
The last few years have had some of the traditional characteristics I have just described: the substantial easing of terms as the economy improves, the rapid expansion of the loan book, the deterioration of loan quality as the economy slows, and a cumulative tightening of loan standards. But this interval has had some interesting characteristics not observed in earlier expansions.