Banks Continue to Tighten Credit for Consumers and Businesses: Fed Survey

The noose around consumer and commercial credit availability tightened even further in the second quarter, according to the latest Senior Loan Officer Opinion Survey, released Monday by the Federal Reserve Board.

The Fed’s quarterly survey is a poll of senior loan officers from 52 major banks in the U.S. and 21 domestic branches of foreign banks.

According to the survey, 60 percent of commercial banks tightened lending standards on commercial and industrial loans to large and middle-market firms. About 65 percent of those financial institutions, up from 50 percent in the April survey, said they had tightened their lending standards on commercial and industrial loans to small firms.

In addition to the overall tightening, about 80 percent of financial institutions reported that they had increased their spreads of loan rates over their cost of funds on commercial and industrial loans to large and middle market firms, with 70 percent widening their spreads on loans to smaller firms.

While credit is tightening and spreads are widening, demand is softening, according to the report. About 15 percent of small domestic and 25 percent of foreign banks reported weaker demand for commercial and industrial loans from firms of all sizes. Similarly, 15 percent of large domestic banks reported weaker demand from small firms, though 5 percent reported that they had increased demand for loans from large and middle market firms.

On the consumer side, 65 percent of banks — compared to 30 percent in April — said they had tightened their lending standards on credit card loans over the last three months, with a similar percentage saying they had tightened lending on consumer loans other than credit card loans.

About 45 percent of domestic respondents said they expected to tighten lending standards on prime residential mortgages in the second half of 2008, with 30 percent expecting to tighten lending standards in the first half of 2009. Concerning nonprime mortgage loans, including nontraditional and subprime mortgages, 65 percent of financial institutions still making these loans said they anticipated tightening their lending standards in the second half of the year.

Additionally, 55 percent of financial institutions said they expect to tighten credit standards on commercial and industrial loans in the second half of the year.