Banks raising lending standards, Fed says

From Bloomberg News

The Federal Reserve said it became tougher for U.S. companies and consumers to get loans in the last three months, particularly to buy real estate.

Most lenders anticipate more delinquencies and losses this year, assuming that “economic activity progresses in line with consensus forecasts,” according to the central bank’s quarterly survey of senior loan officers released Monday in Washington.

The survey, conducted last month through Jan. 17, was available to Fed policymakers last week and may help explain the central bank’s fastest easing of monetary policy since 1990. Chairman Ben S. Bernanke and his colleagues lowered their benchmark rate by 1.25 percentage points last month, aiming to revive lending and spending, thus averting a recession.

“It’s definitely a broader-based tightening than we’ve seen before,” said Edward McKelvey, senior U.S. economist at Goldman Sachs Group Inc. in New York. “The economy is weakening, and weakening in a pretty substantial way.”

About 80% of banks raised standards on commercial-property loans -- a record -- and a majority tightened terms on prime home mortgages.


Bernanke warned in a Jan. 10 speech that there was “considerable evidence that banks have become more restrictive in their lending to firms and households.”

“Financial markets remain under considerable stress, and credit has tightened further for some businesses and households,” the Federal Open Market Committee said in its Jan. 30 statement.

The survey covered 56 domestic banks and 23 foreign institutions. The 56 banks together have $5.95 trillion in assets, representing about 54% of the country’s $11.1 trillion total for all domestically chartered, federally insured commercial banks.

About one-third of U.S. banks said they increased their standards on commercial and industrial loans, while two-fifths said they widened spreads of interest rates over their cost of funds. Both responses represented an increase from results in October.

In commercial real estate, the proportion of banks tightening terms was the highest since the Fed began seeking information on the subject in 1990. About 45% of both U.S. and foreign institutions said demand for such loans weakened in the last three months.

For home loans, about 55% of U.S. banks toughened terms for prime mortgages, up from 40% in October, while 85% of respondents made it tougher to get nontraditional loans, up from 60%, the survey said. A majority of U.S. respondents said demand worsened for prime, nontraditional and sub-prime mortgages.

The Fed also asked banks about their outlook for delinquencies and charge-offs in 2008. For seven of eight questions, no banks expected loan quality to improve for business and consumer loans; most expected quality to worsen.