US banks further tighten lending norms

Washington: Banks in the United States further tightened lending standards in all major categories, especially for consumer loans, in the past three months amid a weakening economic outlook, according to a Federal Reserve survey released on Monday.

The July survey of senior loan officers at 52 domestic banks and 21 branches and agencies of foreign banks also showed that demand for loans by both businesses and households had weakened since the last survey in April.

The survey added to evidence that a year-long credit crunch sparked initially by subprime mortgage defaults is far from easing as banks hoard capital and make it harder to borrow.

The tightness in credit is now being driven by broader weakness in the US economy and is defying efforts by the Fed to boost liquidity in the banking system and keep interest rates low.

"It clearly is going to be difficult to get a loan. The Fed cutting rates doesn't help a lot when you can't get a lender to make a loan," said Gary Thayer, senior economist at Wachovia Securities in St Louis.

He said the tighter lending standards was typical in a weakening economy, and creates headwinds that will help delay recovery, along with a worsening housing slump and still-high fuel prices.

The tightening was particularly pronounced in the consumer sector, where banks increased minimum credit scores required on credit cards and reduced card balance limits.

The survey found 65 per cent of US domestic banks tightened standards on credit cards and other consumer loans, considerably higher than the 30 per cent that tightened card standards in the previous survey.

On commercial and industrial loans, 60 per cent of domestic banks reported tightening credit standards and 80 per cent of banks noted they had increased the spreads of loan rates over their cost of funds on loans to large- and middle-market firms.

"Very large majorities of domestic and foreign respondents pointed to a less favourable or a more uncertain economic outlook, their bank's reduced tolerance for risk, and the worsening of industry-specific problems as reasons for tightening lending standards and terms," the Fed said in its survey report.

The housing sector got no relief in the past three months, as lenders further tightened standards all mortgage categories. The Fed said about 75 per cent of banks tightened lending standards on prime mortgages - those given to customers with good credit histories - versus about 60 per cent who said they tightened in the April.

In a question on larger mortgages, the Fed said about 30 per cent of domestic banks said they had securitised or sold loans that meet new, higher conforming loan amounts to mortgage finance giants Fannie Mae and Freddie Mac.

It clearly is going to be difficult to get a loan. The Fed cutting rates doesn't help a lot when you can't get a lender to make a loan."

Gary Thayer

Senior economist, Wachovia Securities