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The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.



) -- There are two sides to every loan: a borrower and a lender. Simplistic, we know, but it seems a fact often omitted in coverage of bank lending today.

Most media coverage tends to focus solely on the lender side of the equation, on banks that supposedly aren't lending, perhaps in an effort to hoard cash. But is it really so simple?

Yes, lending standards are stricter than in 2007 -- unsurprising after a sharp recession driven mostly by credit market issues.

Fact is, lending standards can be thought of like a pendulum: loosening following long periods of economic growth and profitably steep yield curves; tightening sharply during recession (and for long periods after). And sometimes, those tighter standards overshoot, which seems to have been the case over the past few years.

Some postulate that's due to fear of renewed recession. This is a possible contributing factor, but it's far from the sole reason.

It's widely known that interest rates (yes, even longer-term, market-set interest rates) are quite low by historical standards. And the yield curve is positively sloped, creating an incentive to lend.

But the absolute level of rates is very low, and the market is hugely competitive for borrowers, meaning a bank seeking to charge even a slight premium to buoy profitability risks losing a deal. (All this also makes the


goal of flattening the yield curve using "Operation Twist" seem somewhat dubious.)

In addition, the Fed began paying interest on excess reserves in late 2008, which greatly increased excess reserves parked at the Fed. While that does help mitigate potential risk of bank runs, those reserves have historically been a primary source of lending. Prior to 2008, banks earned nothing on excess reserves on deposit at the Fed.

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So banks now face a decision: Take risk and lend in an ultracompetitive, low-interest-rate environment or earn a risk-free rate close to the federal funds rate just by leaving money at the central bank.

In order to boost loan profitability, banks would have to lend to more risky borrowers -- those where a higher interest rate can be reasonably justified. But this is also the same market banks were bitten most by during the credit crisis. (And the same kind of lending politicians whacked them hardest for.)

So it's a bit understandable banks haven't rushed into loans for riskier borrowers in the past few years. Further, add to this the shifting sand of regulation under Dodd-Frank (among myriad other new regulations globally).

These factors largely explain pressures that have existed on the lending side for the past few years.

As for the often-forgotten demand side, loan demand has been rather tepid. In 2008, it wasn't simply supply of loans that contracted -- demand also fell. In fact, the Federal Reserve's Senior Loan Officer Opinion Survey (SLOOS) showed slack demand through much of 2010.

This is also relatively normal following a recession: Consumers and businesses seek to boost liquidity and borrow less. And in the wake of troubles accessing loans in 2008, many larger businesses simply didn't turn to banks and issued bonds instead.

Now that's all recent history, but this snapshot of lending isn't static. In the second quarter of 2011, year-over-year consumer credit growth turned positive for the first time since 2008. And the SLOOS has also shown loosening consumer underwriting trends since early 2011.

Business lending supply and demand dynamics have similarly improved. In fact, in the first quarter of 2011, commercial and industrial loan demand rose nicely. And the second quarter also showed increasing demand, as depicted below.

Exhibit 1: Commercial and Industrial Loan Demand

Source: Federal Reserve Board Senior Loan Officer Survey.

At the same time, lending standards for commercial and industrial loans have eased.

Exhibit 2: Commercial and Industrial Lending Standards

Source: Federal Reserve Board Senior Loan Officer Survey.

Above all else, the surface-level argument that banks aren't lending out of fear of a downturn likely has some truth to it. But it doesn't explain recent improvements, and it's far too simplistic to explain the dynamics of a highly complex industry with many different inputs determining loan availability.

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

This article constitutes the views, opinions, analyses and commentary of Fisher Investments as of September 2011 and should not be regarded as personal investment advice. No assurances are made Fisher Investments will continue to hold these views, which may change at any time without notice. In addition, no assurances are made regarding the accuracy of any forecast made herein. Past performance is no guarantee of future results. A risk of loss is involved with investments in stock markets.