Fancy a Loan?

Fancy a Loan?

From a global view, lending has never been tighter. Says one top economist: "Banks are turning away borrowers left and right."

banking by Craig Torres | Bloomberg News

A record share of U.S. banks made it harder for companies to get loans in the past three months, concerned about mounting losses from the economic slump and financial crisis, a recent Federal Reserve report showed.

"Almost all domestic and foreign respondents pointed to a less favorable or more uncertain economic outlook as a reason for tightening their lending standards" on commercial and industrial loans in the past three months, the Fed said Nov. 3 in its quarterly Senior Loan Officer Survey. "Large fractions of domestic banks again reported tightening standards on both credit card and other consumer loans."

Evidence of tougher loan standards may have prompted Fed officials to cut the benchmark interest rate to 1% last month. The deteriorating economy is "playing a more prominent role in the tightening of credit terms," said Richmond Fed President Jeffrey Lacker.

The survey, conducted between Oct. 2 and Oct. 16, covers 55 domestic banks with combined assets of $6.2 trillion, along with 21 foreign institutions.

"The credit crisis reached up and grabbed the throat of the global economy and choked off economic growth," Dallas Fed Bank President Richard Fisher said in a Bloomberg Television interview.

Record tightening

About 85% of domestic banks tightened lending standards on commercial and industrial loans to large and mid- size firms, the highest since the survey began in its current format in 1991, the Fed said. Half of domestic banks said they were "somewhat or much less willing" to make consumer installment loans over the past three months, the highest since the current survey began.

"It has never been harder for businesses and individuals to get a loan from the bank," said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. "Banks are turning away borrowers left and right."

Some 95% of U.S. banks raised the costs on credit lines to large firms, and "nearly all banks" increased the spread on borrowing rates over the cost of funds on loans to large and mid-sized firms versus July, the Fed said.

"Higher fractions of banks reported having reduced both the maximum size and the maximum maturity of loans or credit lines to large and middle-market and to smaller firms," the survey said.

About 70% of U.S. banks indicated they tightened standards on prime mortgage loans, down from 75% in the previous survey in July, the central bank said. The survey results were available to Fed officials for their two-day meeting Oct. 28-29.

The U.S. economy contracted at a 0.3% annual pace from July to Sept. The unemployment rate moved up to 6.1% in September from 4.7% the same month a year ago. The rate could jump to 6.3% in October as employers shed another 200,000 jobs, according to economists surveyed by Bloomberg News.

"The supply of credit is coming under ever increasing tighter conditions," said Fisher. "This exacerbates the downward slippage of the economy."

The Fed has reduced its main rate 4.25 percentage points over the past 14 months to 1%. Still, the average rate on a 30-year mortgage stood at 6.46% last week, up from 6.26% a year ago, according to data from Freddie Mac.

Falling home values

Banks may be reluctant to lend as property values fall. Home prices in 20 U.S. metropolitan areas dropped 16.6% in August from a year earlier, according to the S&P Case-Shiller Home-Price Index. The gauge has fallen every month since January 2007. "Rates for consumers and businesses aren't very low right now" even though the Fed has cut its policy rate, said Stephen Stanley, managing director and chief economist at RBS Greenwich Capital Markets Inc. "We are still in a recession" and banks are probably "marking down the credit quality" of their customers.

Of the 29 banks that originate non-traditional mortgage loans, about 90% reported tighter lending standards, up from 85% in the prior survey, the Fed said. About half of the responding banks said they experienced weaker demand for mortgages from borrowers with the highest credit scores.

"Nearly 60% of respondents indicated that they had tightened lending standards on credit card loans, while nearly 65% of respondents indicated that they had tightened lending standards on other consumer loans," the Fed said. About half of all responding banks said they had experienced weaker demand for consumer loans of all types over the past three months, the highest in the survey's history.

Financial markets tumbled into near-panic conditions following the Sept. 15 bankruptcy filing by Lehman Brothers Holdings Inc. Yield differences between the Fed's target rate and the London interbank offered rate, or Libor, for three-month loans in dollars rose to 4 percentage points on Oct. 10 as banks hoarded cash. The spread averaged 0.40 percentage points in the first six months of the year.