Thursday, May 8, 2008
Banks Toughen Terms on Loans
In a blow to an already wobbly U.S. economy, banks are imposing tougher lending terms for consumers and businesses across the board.
The Federal Reserve's survey of banks' senior loan officers, one of the most closely watched gauges of lending practices, found that the credit crunch is widening. The proportion of domestic banks tightening their standards was at or near historical highs for almost all loan categories, including credit cards and student loans.
DAILY ECONOMICS NEWSLETTER Sign up for our new email of the day's Real Time Economics posts, by Greg Ip, Sudeep Reddy and the Journal's economics team. The email also includes the latest economic headlines, data and columns. Choose HTML or plain text.• Economists React: Credit Crisis Spillover?• Econ Blog: Signs of Service Sector StabilizationThe survey, conducted in April, showed that demand for loans weakened in most categories, though not as much as in the previous three months.
The lending pullback comes as the economy slows to a crawl. The banks' hesitancy to lend could restrain consumer spending as well as investment by businesses that depend on borrowing.
About a third of the 56 domestic banks surveyed in April reported raising their standards for credit-card loans over the past three months, up from just 10% in January. Banks are being tougher on credit-score requirements and are reducing credit limits on card loans. In addition, 44% of banks, up from 30% in January, tightened standards for other consumer loans.
The latest Fed survey also reflects a pullback by banks offering student loans, an area that has drawn increasing concern from policy makers. Of the banks that participate in the federal student-loan program, about 55% said they would reduce their lending in the fall of 2008.
Banks continue to get more restrictive in their real-estate lending as the housing bust adds to their losses. About 70% of banks said they tightened standards for new home-equity lines of credit over the prior three months. Roughly half of the banks said they tightened terms on existing home-equity lines of credit over the past six months because of home prices falling below their appraised values. Most lenders also cited loan defaults and a change in borrowers' financial circumstances for tightening terms.
More than 60% of banks tightened standards on prime mortgages, up from just over half in January and 15% a year ago. At least three out of four said they tightened standards for nontraditional and subprime mortgages in the past three months. For commercial-real-estate loans, about 80% of banks tightened their lending standards.
For the consumer and business sectors, banks aren't just tightening standards but increasing how much they charge. About 55% of domestic banks said they tightened standards on loans to large and medium-sized businesses in the prior three months, slightly more than for small firms. In January about 30% had done so. About three-fourths said they increased loan rates over their cost of funds, up from 45% in January.
Most domestic and foreign banks "pointed to a less favorable or more uncertain economic outlook and to a worsening of industry-specific problems as reasons for tightening their lending standards and terms" on business loans, the Fed said. The banks cited less tolerance for risk and decreased liquidity in the secondary market. More than a third of domestic banks and almost half of foreign institutions "noted that concerns about banks' current or expected capital position had contributed to more-stringent lending policies," up from the January survey.
A separate report Monday from the Institute for Supply Management indicated that the service sector expanded slightly in April, after three months of contraction, but remains only barely in growth territory. The group's nonmanufacturing index rose to 52 last month, up 2.4 points from March; figures above 50 indicate generally expanding activity.
Write to Sudeep Reddy at sudeep.reddy@wsj.com
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