Fed Says Banks Tightened Lending in Second Quarter
U.S. banks tightened standards on all types of loans in the second quarter and said they expect to maintain strict criteria on lending until at least the second half of 2010, a Federal Reserve report showed today.
“Domestic banks indicated that they continued to tighten standards and terms over the past three months on all major types of loans to businesses and households,” the Fed said in its quarterly Senior Loan Officer survey. “The net percentages of banks that tightened declined compared with the April survey.”
The report suggests that lenders and borrowers are wary of taking on more risk until the U.S. economy shows clear signs of growth. Most banks expected standards across all loan categories “would remain tighter than their average levels over the past decade until at least the second half of 2010,” the report said.
“Consumer and commercial borrowers have clamped down,” Kevin Fitzsimmons, a managing director at Sandler O’Neill & Partners LP in New York, which specializes in bank research, said before the report. “You just need some economic growth to materialize and then you will see more lending.”
The Fed report said that demand for loans continued to weaken “across all major categories” except prime residential mortgages. Banks cited falling demand and credit quality as the primary reasons for decreases in commercial and industrial lending, according to the central bank.
Some 55 U.S. banks and 23 U.S. branches of foreign banks were surveyed by the Fed between July 14 and July 28.
Home Mortgages
Total home mortgages were nearly unchanged in the first quarter compared with the final quarter of 2008 at $10.4 trillion, according to the Fed’s second-quarter Flow of Funds report. Consumer credit decreased at an annual rate of 5.25 percent in the second quarter, the Fed said Aug. 7 in a separate release.
“After holding nearly flat in the April survey, the net percentage of domestic banks that tightened standards on prime residential real estate loans fell to roughly 20 percent,” the loan officer survey said. “The net fraction of respondents that tightened standards on nontraditional residential mortgages fell to roughly 45 percent, from 65 percent in April.”
The Fed today extended by three to six months an emergency program aimed at restarting credit markets, a move that may cushion the commercial real-estate industry from rising defaults and falling prices payday loans.
The Term Asset-Backed Securities Loan Facility, with a capacity of as much as $1 trillion, will expire June 30 for newly issued commercial mortgage-backed securities, instead of Dec. 31, the Fed and U.S. Treasury said today in a statement in Washington. For other asset-backed securities and CMBS sold before Jan. 1, the plan was extended three months to March 31.
Tighter Than Average
With regard to commercial real estate loans, “nearly all banks indicated that current standards were tighter than their longer-term average levels,” the Fed report said. “Around 40 percent expected standards to return to longer-term average levels by the second half of 2010 or in 2011 for both investment-grade and non-investment-grade lending.”
The Fed and the Treasury have loaned or invested billions of dollars in banks to support credit growth. The Fed has expanded total assets on its balance sheet by $1.1 trillion to $2 trillion, channeling loans to banks, corporations, and programs aimed at reviving financing to consumers and real estate.
The Federal Open Market Committee said Aug. 12 that “economic activity is leveling out,” the strongest indication yet that officials may see an end to the worst recession since the 1930s. Household spending remains constrained due to job losses and “tight credit,” officials said.
Economy to Expand
Forecasters surveyed by Bloomberg News expect the economy to expand at a 2.2 percent annual pace in the third quarter, according to the median estimate of 55 economists.
Economic reports suggest the recovery could be slower. Sales at U.S. retailers fell 0.1 percent in July, the first drop in three months, the Commerce Department said Aug. 13. The Reuters/University of Michigan preliminary index of consumer sentiment decreased to 63.2 in August, the lowest since March, from 66 in July. The measure reached a three-decade low of 55.3 in November.
A 3.3 percent decline in the Standard & Poor’s Financials Index helped lead the S&P 500 to a 2.2 percent decline at 1:45 p.m. in New York trading today.
The Fed’s April Senior Loan Officer Survey showed that about half of respondents reported tightened lending on prime mortgages, and about 60 percent set stricter standards for credit card loans.