Interest Rate Roundup

Monday, February 04, 2008

Fed survey: Lending standards tightening across the board

Every quarter, the Federal Reserve conducts a study of bank loan demand and underwriting standards. The "Senior Loan Officer Opinion Survey on Bank Lending Practices," in the words of the Fed, is designed to shed some light on "changes in the standards and terms of the banks' lending and the state of business and household demand for loans." The latest survey (PDF Link) was conducted in January; 56 domestic banks and 23 foreign banks with operations here in the U.S. responded.

The results are reported in terms of "net tightening/loosening." Specifically, the Fed adds up the percentage of banks that either "tightened considerably" or "tightened somewhat" in a given loan category and nets that out against the percentage of banks that "eased somewhat" or "eased considerably." On this page, which has historical data, a positive percentage figure means more banks tightened than loosened; a negative percentage figure means more banks loosened than tightened.

So what did the latest survey show? That lenders are tightening standards across the board. Specifically ...

* A net 32.2% of lenders tightened standards on commercial and industrial (C&I) loans to large- and mid-sized customers in Q1 2008. That was up from 19.2% in the prior quarter and 0% a year earlier. This measure hasn't been higher since Q1 2002 (45.4%). Moreover, 43.6% of those surveyed were increasing the interest rate premium they charged C&I borrowers above and beyond their cost of funds. That's up from 34.6% a quarter earlier and the highest reading since Q4 2001 (58.9%).

* What about commercial real estate (CRE) loans? Fasten your seat belt. A whopping 80.3% of lenders tightened standards there. That's up from 50% in Q4 2007 and 26.3% a year earlier. Not only that, but it's also the highest reading since the Fed began reporting figures in 1990. Incidentally, demand for CRE loans is tanking -- 46.5% of those surveyed reported falling demand for CRE financing, the worst reading since Q4 2001 (-51.8%).

* The residential mortgage business is in even worse shape. The Fed has only been reporting separate net tightening figures for prime mortgages, "nontraditional" mortgages, and subprime loans since Q2 2007. Some 71.5% of lenders were tightening standards in subprime, while 84.6% were tightening standards in the nontraditional market (think Alt-A loans here). Those were the highest readings yet.

More importantly, a net 52.9% of lenders surveyed were tightening standards on PRIME mortgages. That's up from 40.8% a quarter earlier and the highest the Fed has ever found. If you use the historical data series, the previous peak tightening reading for residential mortgages was 32.7% in Q1 1991.

* Last but not least, the percentage of lenders tightening standards on credit card loans jumped to 9.7% from 3.2% in Q4 2007. That's the highest since Q2 2003 (a tie). The tightening percentage for other consumer loans is now running at 32.1%, the highest since the Fed began collecting data on that category of loans in 1996.

My take on these figures:

Bankers have gone from exceedingly giddy to extremely grim in a span of just a few quarters. It's easy to see why. They were already facing substantial -- and rising -- losses on residential mortgages. Now, the economy is weakening and the threat of recession is very real. As a result, the credit quality of their commercial real estate, credit card, and auto loan portfolios are starting to deteriorate.

The Federal Reserve is clearly trying to combat this newfound stinginess by cutting interest rates. But it remains to be seen how bankers will react ... or how long it will take to re-liquefy the credit markets.


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