U.S. banks were miserly with credit through mid-January, as the economy plunged and loan demand deteriorated, the Federal Reserve said last week in a quarterly lending survey.
Banks continued to impose tight conditions on borrowers, even as the Treasury Department provided about $200 billion in capital infusions under a special $700 billion financial rescue law. Treasury officials have pressed lenders to make loans to good clients to get the economy moving. The Fed has begun buying up to $500 billion in mortgage-backed securities to unfreeze lending.
The Fed report showed slight improvement. Banks were more willing to make mortgage and consumer installment loans in the past three months. Fewer banks cited their worsening capital position as a reason for ratcheting up standards for business loans.
Still, the Fed said the number of banks reporting tighter lending policies “stayed very elevated.” The share of domestic banks reporting dropping demand for commercial and industrial loans soared to 60 percent from 15 percent the previous quarter.
“Though there was an incremental slowing in the pace at which credit standards are tightening across most sectors, it was modest in most areas; credit still continues to tighten at a fairly rapid pace,” Goldman Sachs said in an analysis for clients, calling mortgage lending an area where credit relaxed significantly.
Treasury Secretary Timothy Geithner is set to unveil a plan this week to shore up the financial system, including finding a way to get bad assets off banks’ books and slow record home foreclosures. The White House this week could announce more restrictions on executive pay and bonuses at firms receiving aid.
The moves come as new data show the economy deteriorating. The Commerce Department said consumer spending fell for a sixth-consecutive month in December, a new record. Consumer spending rose 3.6 percent in 2008, the slowest pace since 1961. Construction spending fell in December, with homebuilding down 27.2 percent in 2008.
Between problem assets, sparse capital, rising unemployment and bankruptcies, banks are nervous about offering credit, says Mark Zandi, chief economist at Moody’s Economy.com. “The credit spigot is completely shut,” Zandi said. “Banks are panicked, and they have ratcheted up their lending standards for all households and businesses.”
The Fed surveyed 51 domestic banks and 23 U.S. offices of foreign banks. It found about 60 percent of domestic banks tightened standards for credit card and other consumer loans, about the same share as the October survey. Nearly 80 percent of domestic banks toughened standards for commercial real estate loans, down from 85 percent the previous quarter.
Domestic banks told the Fed they were cutting existing credit lines. About 60 percent of banks reduced limits for commercial construction lines of credit in the past three months, about 50 percent set lower limits for financial firms, and about 30 percent tightened limits for business credit cards. About 40 percent of domestic banks cut the size of existing home-equity credit lines.â–
