Fewer banks are tightening their lending standards, but credit constraints on U.S. businesses and consumers aren't likely to let up before the middle of next year.
In its July survey of loan officers, released Monday, the Federal Reserve found that about 30% of 55 domestic banks toughened criteria for obtaining commercial and industrial loans, down from about 40% in April and a peak of about 85% in November. The steadily improving credit conditions come as the U.S. economy shows increasing signs of emerging from the deep recession.
But most loan officers also said they didn't expect their banks' lending standards to return to normal until the second half of 2010, at the earliest. It could be an obstacle to a recovery if a lack of credit further constrains businesses from investing and households from spending.
Disappointing reports from last week on retail sales and consumer confidence have heightened worries on Wall Street and among economists of a "consumer-less" recovery. Consumer spending accounts for about 70% of U.S. economic activity.
Separately, the Fed and Treasury Department said Monday that they would extend into next year an emergency financing program aimed at boosting consumer and business lending.
The Term Asset-Backed Securities Loan Facility program was launched in March, providing funds for investors to buy securities backed by auto and student loans, credit card debt and business debt, including commercial real estate mortgages. The program, originally scheduled to expire at year's end, will run through March 31 for most types of loans.
"Conditions in financial markets have improved considerably in recent months," the Fed and Treasury said. "Nonetheless, the markets for asset-backed securities backed by consumer and business loans and for commercial mortgage-backed securities are still impaired and seem likely to remain so for some time."
The Fed has been increasingly concerned about the distressed commercial property market, which includes stores and office buildings. Unlike the housing market, the commercial sector's problems are still unfolding, with many loans due in the next couple of years.
Recent government statistics show that before the downturn the commercial construction boom was even bigger than previously thought.
That raises the specter of more defaults and foreclosures in this sector, as well as more trouble for banks and other financial institutions that lent money.
The announcement of the securities loan program's extension came after weekend reports about the demise of Colonial Bank, a regional institution in Alabama that was aggressive in commercial and other real estate lending, which was the biggest bank failure in the U.S. this year. Some analysts expect the program to expand for commercial mortgages.
Not surprisingly, the July loan officer survey revealed tighter standards for commercial real estate lending than for other business loans.
Of the domestic banks, about 45% said they had toughened qualifications for these loans over the last three months, although that was down from about 65% in the April survey.
The credit situation for residential real estate loans was somewhat better. The survey found that 22% of banks had tightened standards in home mortgage lending for prime borrowers, compared with 49% in April.
In the latest survey, the Fed asked loan officers to rank factors in the decline in commercial and industrial loans this year.
The top answer: lower demand from creditworthy borrowers.
One big reason for lower commercial loan demand, the survey found, is that businesses are reducing investment in plant and equipment purchases.
Demand for consumer loans also remains weak. Despite recent improvements in the housing market, only about 16% of banks reported stronger demand for mortgage loans to individuals over the last three months, which was down from 37% during the April survey period.
"Many consumers and businesses are in 'save mode' and are not demanding much credit," Sara Kline, an economist at Moody's Economy.com, said in her analysis of the Fed survey. "The perception of tighter credit standards on the part of consumers may be keeping some would-be borrowers from applying for loans altogether."