Wednesday, February 4, 2009

Bank lending standards easing? No way, and demand for loans is falling too

The Federal Reserve released the January Senior Loan Offiicer Survey on Bank Lending Practices. The report is troubling, and indicates that not only are lending standards tight, but demand for lending is declining, too. The highlights from Bloomberg:
A majority of U.S. banks made it tougher for consumers and businesses to get credit in the past three months even as lenders received infusions of taxpayer funds, a Federal Reserve report showed today.

“About 65 percent of domestic banks reported having tightened lending standards on commercial and industrial loans to large and middle-market firms,” the Fed said in its quarterly Senior Loan Officer survey. “Large fractions of domestic banks continued to report a tightening of policies on both credit-card and other consumer loans.”

Today’s report may underscore concern among Obama administration officials and some U.S. lawmakers that banks that have received more than $200 billion of taxpayer funds are failing to lend that on to customers. Treasury Secretary
Timothy Geithner plans to unveil an overhaul of the government’s financial-bailout program next week, an administration aide said.

The survey showed lending ov
erall was only slightly less restrictive than in the third quarter, when the Lehman Brothers Holdings Inc. failure reverberated throughout the financial system.
The questions are designed to ask how banks have changed credit standards over the last three months, so the fact that a smaller percentage of respondants report having tightened standards doesn't necessarily mean that loan conditions have become any easier to meet. In fact, the survey indicates that lending standards are not easing at all, simply remaining tight, or only tightening somewhat.

The really troubling news in the report is that the heightened economic uncertainty is spreading to borrowing decisions. The stall in bank lending is coming from both the supply side (tight bank standards) and from the demand side (ability/willingness to borrow).

Demand for commercial and industrial lending turned down sharply

The chart illustrates the percentage of survey respondants (all bank sizes) that reported tightening lending standards on commercial and industrial loans over the last three months (October-December), and those that reported increased demand for laons since 1990. Lending standards remain very tight, where zero bank respondants reported any easing in standards over the last three months. Demand turned down sharply across all bank sizes, where roughly 60% of net bank respondants reported a weakening in the demand for lending.

Weakenening demand coupled with tight lending standards is problematic. It is consistent with the precipitous decline in fourth quarter investment, and does not bode well for expected investment growth in the near-term.

Demand for residential mortgages has increased somewhat, but is still weakening in net across all loan types

The chart illustrates the percentage of survey respondants (all bank sizes) that reported tightening mortgage lending standards over the last three months (October-December), and those that reported increased demand for residential mortgages. Only 4 banks surveyed reported originating subprime loans - this market is dead.

The chart indicates that lending standards appear to have eased somewhat - with prime net tightening has fallen from 69% to 47% - but that is not the story. Prime mortgages have simply remained tight, tightened somewhat, or in 3 (out of 51 respondents) cases have tightened considerably. No banks reported easing on prime lending standards, which is rational behavior when the labor market is hemmorhaging workers.

Furthermore, the number of banks that reported weakening demand for mortgage lending is still -10% in net. This is troubling, given that prices declined precipitously over that period, and mortgage rates fell, too. This number likely needs to turn positive, indicating that a majority of banks report growing demand, in order to see any stabilization in home sales.

More headlines of the report: lending standards remain tight, but the percentage of respondants that reported tightening further is declining somewhat. There is no evidence of easing.

  • Since the commercial mortgage backed securities market froze up in the middle of 2008, just 15% of domestic banks extended new loans for commercial real estate.
  • Across many loan types, banks are reducing credit limits on existing lines of credit, including consumer and commercial loans.
  • Banks are increasingly applying interest rate floors to new loan agreements (price the loan at a minimum interest rate, given that short-term rates are near zero).
  • Close to 55 percent of respondents reduced the extent to which both credit card accounts and other consumer loans were granted to borrowers that did not meet minimum credit requirements.
  • Credit scores required to secure a credit card continue to rise, as indicated by 45% of the responses.

Bank lending is tight, tightening, and likely to stay tight until the fear of systemic crisis abates.

Rebecca Wilder

1 comment:

  1. Please banks, tighten your lending standards to a realistic level. And STAY THERE!! Loosey goosey just doesn't cut it anymore.

    ReplyDelete