Raw Finance

The monthly Senior Loan Officer Opinion Survey conducted by the Federal Reserve showed that banks severely tightened their lending standards on all types of loans to businesses and consumers over the three-month period between July and October 2008.  The survey, sent to 55 domestic banks and 21 U.S. branches of foreign banks reported that banks had imposed stricter standards on commercial, industrial, commercial real estate, residential real estate and consumer loans.  In addition to the tighter standards, banks also reported that pricing terms of all types of loans had become more conservative.  The survey further notes that domestic banks moved to protect themselves from the uncertain economy by reducing credit limits on existing credit card account both to prime and nonprime borrowers.

The survey appears to show that the tightening of lending standards and pricing has led to two outcomes: (1) demand for all types of loans has dropped; and (2) borrowing against preexisting loan commitments has increased.  What can be reasonably inferred from the survey is that businesses and consumers are borrowing what they can while they can, and they are not seeking new loans, in part, because they no longer qualify or the pricing terms of the offered loan are no longer advantageous.  Also, the drop in loan demand may stem from a need to preserve capital and reduce debt.

In a recent post, I noted effect of the drop in housing prices and how it has effectively cut off the main source of household spending, home equity loans.  The Fed survey stated that a full 75 percent of loan officers said that their banks had stiffened standards that made it more difficult for borrowers to qualify for revolving home equity lines of credit (HELOCs), while 25 percent of respondents said demand for those HELOCs had weakened — twice the drop in demand that was reported in July.

Notably, a significant number of banks reportedly raised minimum required down payments, as well as spreads of loan rates, on many consumer loans. And half of banks indicated they had become either somewhat or much less willing to make consumer installment loans over the past three months.  This is proof of one of the reasons why there will not be a rebound in consumer spending.

As with other recent reports, we should keep in mind that these cover a time period in which the worst of the credit crisis was just beginning.  The economic reports for the period between October and December 2008 ought to show a severe economic decline due to the freezing of the credit markets that began in late September.

The Fed’s bank senior loan officer survey may read in full here.