Tuesday, May 6, 2008

Credit Tightening Across the Board

Yesterday the Federal Reserve issued its survey of lenders. The picture is not pretty:

About 55 percent of domestic banks—up from about 30 percent in the January survey—reported tightening lending standards on C&I loans to large and middle-market firms over the past three months. Significant majorities of respondents reported tightening price terms on C&I loans to these firms, and in particular, on net, about 70 percent of banks—up from about 45 percent in the January survey—indicated that they had increased spreads of loan rates over their cost of funds. In addition, smaller but significant net fractions of domestic banks reported tightening non-price-related terms on C&I loans to these firms over the past three months.

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About 60 percent of U.S. branches and agencies of foreign banks—a slightly smaller fraction than in January—noted that they had tightened lending standards on C&I loans over the past three months, and very large majorities also reported that they had tightened price terms on such loans. In particular, around 80 percent of foreign banks—about the same as in the January survey—reported increasing spreads of loan rates over their cost of funds. Finally, large fractions of foreign respondents reported tightening selected non-price-related terms over the past three months.

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About 80 percent of domestic banks and 55 percent of foreign banks—fractions similar to those in the January survey—reported tightening their lending standards on commercial real estate loans over the past three months. Concerning loan demand, about 35 percent of domestic banks and 45 percent of foreign institutions reported weaker demand, on net, for commercial real estate loans over the past three months.

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About 60 percent of domestic respondents—a somewhat larger fraction than in the January survey—indicated that they had tightened their lending standards on prime mortgages.2 Of the 37 banks that originated nontraditional residential mortgage loans, about 75 percent—a somewhat smaller fraction than in the January survey—reported a tightening of their lending standards on such loans over the past three months.3 Finally, 7 of the 9 banks that originated subprime mortgage loans—a somewhat higher proportion than in the January survey—indicated that they had tightened their lending standards on such loans.4

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About 50 percent of domestic respondents reported having tightened terms on existing HELOCs over the past six months. Nearly all respondents pointed to declines in the value of the collateral significantly below the appraised value for the purposes of the HELOCs as reasons for tightening terms on these lines. Large majorities of respondents also cited increased defaults of material obligations under loan agreements, as well as significant changes in borrowers’ financial circumstances, as additional reasons for tightening terms on the existing HELOCs.

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About 30 percent of domestic banks—up from around 10 percent in the January survey—reported that they had tightened their lending standards on credit card loans over the past three months. In addition, significant net fractions of respondents indicated that they had reduced the extent to which such loans were granted to customers who did not meet credit-scoring thresholds, reduced credit limits on credit card loans, and increased minimum required credit scores.


Remember -- the US economy is credit dependent; without a steady supply of credit the economy will slow. That's a prime reason why the above news raises serious issues going forward. It brings into question the possibility of a 2H2008 rebound along with a bottoming in housing. In short -- it puts the entire economy into harms way.

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