Raw Finance

Although banks are still tightening lending standards (meaning it is more difficult for borrowers to qualify for a loan), fewer are doing so, according to the October 2009 Bank Lending Survey conducted by the Federal Reserve Board.  In the October survey, domestic banks indicated that they continued to tighten standards and terms over the past three months on all major types of loans to businesses and households. However, the net percentages of banks that tightened standards and terms for most loan categories continued to decline from the peaks reached late last year. The exceptions were prime residential mortgages and revolving home equity lines of credit, for which there were only small changes in the net fractions of banks that had tightened standards. A small net fraction of branches and agencies of foreign banks eased standards on commercial and industrial (C&I) loans, whereas a significant net fraction continued to tighten standards on commercial real estate (CRE) loans. 

Looking at demand for loans, it seems that homeowners and homebuyers are still looking for credit, while business loan demand continues to slacken.  Demand for most major categories of loans at domestic banks reportedly continued to weaken, on balance, over the past three months. This weakening was: somewhat less widespread than in the July survey for C&I loans, CRE loans, and nontraditional mortgages; approximately the same for consumer loans; and significantly more widespread for home equity lines of credit. However, banks reported stronger demand, on net, for prime residential real estate loans. Demand for C&I and CRE loans at foreign banks continued to weaken, on balance, but the weakening was somewhat less widespread than that in the July survey. 

This news is consistent with at least a couple of emerging economic themes: (1) the economic recovery will be sluggish and job creation will be slow – if businesses are not looking to borrow to grow, they’re not likely looking to hire more workers either; and (2) federal government tax credits are spurring home sales – stronger demand for prime residential real estate loans would suggest this is the case, and now that the Homebuyer Tax Credit has been extended to May 1, 2010 (to sign a contract) and July 1, 2010 (to close on the purchase) and expanded to certain current homeowners, demand for residential real estate loans should remain strong through next spring. 

The survey also asked respondents three special questions with regard to: (1) the decline in C&I lending over the first eight months of 2009; (2) the status of CRE loans that were due to mature in September 2009; and (3) the changes in credit card lending practices due to the enactment of the Credit Card Accountability and Responsibility and Disclosure (Credit CARD) Act of 2009. 

In response to a special question on the sources of the decline in C&I lending this year, the two sources domestic banks cited most often as being “very” important were decreased originations of term loans and decreased draws on revolving credit lines. In response to a second special question, banks indicated that, of the CRE loans on their books that were scheduled to mature by September of this year, more loans had been extended than refinanced. In response to special questions concerning the Credit CARD legislation passed in May 2009, a majority of banks reported that they had yet to fully comply with the new law. Banks indicated that they expected to tighten many of the terms and conditions of credit card loans as a result of the legislation, with the notable exception of penalty fees and the length of the grace period for payments. 

Please click on the following link to view a summary of the report, with links to tables and the full report: The October 2009 Senior Loan Officer Opinion Survey on Bank Lending Practices