Financial Update (Third Quarter 2008)

Bank Survey Shows Tightening Lending Standards

photo of people filling out paperwork The credit crunch that has constricted the economy in 2008 continues, according to the Fed's recent Senior Loan Officer Opinion Survey conducted in July. The survey, which covers 52 U.S. banks with combined assets of $6.1 trillion and 21 foreign financial institutions doing business in the United States, found increasing caution in banks' approaches to making loans. For example, about three-quarters of U.S. banks said they became stricter on prime mortgage loans, which is an increase from 60 percent who cited stricter standards in the April survey.

Consumers see tighter credit standards
About 65 percent of domestic banks—up considerably from about 30 percent in the April survey—said their lending standards on credit card loans had tightened over the past three months. About the same percentage of banks reported having tightened standards on consumer loans other than credit card loans, a number up from roughly 45 percent in the April survey.

Overall, slightly more than a third of the banks surveyed expressed less willingness to make consumer installment loans compared with three months earlier. Regarding loan demand, about 30 percent of respondents said they had experienced weaker demand for all types of consumer loans over the last three months, up from about 20 percent in the April survey.

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Lenders cautious on residential real estate
Standards for other mortgage categories also tightened. "Large majorities of domestic respondents reported having tightened their lending standards on prime, nontraditional, and subprime residential mortgages over the previous three months," the survey noted.

Of the 32 respondents that originate nontraditional residential mortgage loans, about 85 percent—up from 75 percent in the April survey—reported having tightened their lending standards on such loans. Six of the seven respondents that originated subprime mortgage loans—a greater proportion than in the April survey—said they had tightened their lending standards on those loans during the past three months.

Commercial and industrial lending also sees tighter standards
About 60 percent of domestic banks—up slightly from the April survey—reported having tightened lending standards on commercial and industrial (C&I) loans to large and middle-market firms over the past three months. About 65 percent of those banks—up from about 50 percent in the April survey—also said they had tightened their lending standards on C&I loans to small firms over the same period.


August 21, 2008