From the Financial Times:
Banks expect to tighten lending standards for US households and businesses through to the end of the year and into 2009, damping any hopes of a quick end to the credit squeeze, according to a report by the Federal Reserve.
The Fed survey of senior loan officers is conducted every three months. Monday’s report was based on responses from 52 US banks and 21 US branches of internationally based banks in mid-July.
It highlighted that domestic banks had tightened standards in “all major loan categories” since the last survey in April, with consumer loans in particular becoming tougher to secure.
“Coming at a time when the cash flow from the rebates has dried up and the growth in labour income is slowing to a crawl, the restriction in lending to households underscores the challenges facing the consumer in the second half of the year,” said Michael Feroli, a US economist at JPMorgan.
The survey also pointed to a bleak outlook, with “large net fractions” of foreign and US banks expecting lending standards to tighten further in the remaining part of this year and “smaller, though substantial, net fractions” expected the stricter terms to continue next year.
“These days, you practically need the Jaws of Life [a hydraulic rescue tool] to pry open a banker’s wallet,” said Mike Larson, an interest rate and property analyst at Weiss Research.
“Overall, the longer the crunch lingers, the longer the economic slump could drag on.”
Banks in the United States further tightened lending standards in all major categories, especially for consumer loans, in the past three months amid a weakening economic outlook, according to a Federal Reserve survey released on Monday.
The survey added to evidence that a year-long credit crunch sparked initially by subprime mortgage defaults is far from easing as banks hoard capital and make it harder to borrow.
The tightness in credit is now being driven by broader weakness in the U.S. economy and is defying efforts by the Fed to boost liquidity in the banking system and keep interest rates low.
“It clearly is going to be difficult to get a loan. The Fed cutting rates doesn’t help a lot when you can’t get a lender to make a loan,” said Gary Thayer, senior economist at Wachovia Securities in St. Louis.
He said the tighter lending standards was typical in a weakening economy, and creates headwinds that will help delay recovery, along with a worsening housing slump and still-high fuel prices.
The tightening of credit was particularly pronounced in the consumer sector, where banks increased minimum credit scores required on credit cards and reduced card balance limits.
he housing sector got no relief in the past three months, as lenders further tightened standards all mortgage categories. The Fed said about 75 percent of U.S. banks tightened lending standards on prime mortgages — those given to customers with better credit histories — versus about 60 percent who said they tightened in the April.
However, 50 percent of the respondents said there was a lack of demand for such loans and 40 percent said there was a limited number of mortgage applicants at their bank who meet the Fannie Mae and Freddie Mac underwriting criteria for conforming jumbo loans, which require better credit scores and higher down payments.