Fed reports banks tightened credit in first quarter of 2008

Banks in the US reported wide-ranging credit-tightening and a decline in loan demand over the last three months, according to a Federal Reserve survey released today.

For large and medium sized companies, 55% of US banks reported tighter lending standards in the April survey, up from 30% in January. Fifty-two pct had higher standards for small businesses.

The cost of loans also went up, with 70% of banks saying they raised the spread of their loan rates over their cost of funds for large and medium firms. Sixty-five pct raised spreads for small firms.

Foreign banks operating in the US reported even larger percentages of credit tightening and increased spreads.

The bankers "pointed to a less favorable or more uncertain economic outlook," the Fed survey said, and "noted that concerns about their banks' current or expected capital position had contributed to more stringent lending policies over the past three months."

Although some companies were returning to banks for financing after non-bank sources became less attractive, the bankers overall said businesses were cutting back on borrowing because they were cutting back on investment in plant and equipment.


For their mortgage lending, banks were making traditional mortgages harder to get even for the best borrowers and backing out of any other kind of mortgage lending. About a quarter said demand for mortgages had fallen in the last three months.

Sixty-two pct of the banks said they now had tighter standards even on prime mortgages for borrowers with the best credit ratings.

Seventy-six pct of the banks that still made so-called non-traditional home loans (with special down payment or repayment features) said they were tighter with credit. 15 of the 52 banks responding said they no longer made non-traditional loans.

Seventy-eight pct of the banks that made subprime loans reported tougher standards but only 9 of 52 were still in the subprime business.


Banks were also getting tougher on credit cards. Thirty pct in April vs 10% in January had reduced their lending. "Significant" numbers of banks "reduced credit limits on credit card loans and increased minimum required credit scores." The banks were also raising their interest rate spreads on consumer lending.

On student loans, 40-45% of banks expected cutbacks this fall.



source: The April 2008 Senior Loan Officer Opinion Survey on Bank Lending Practices
Board of Governors of the Federal Reserve System
http://www.federalreserve.gov/boarddocs/SnLoanSurvey/200805/fullreport.pdf