Banks Keep Tightening the Vice

source for article: The Watch List Newsletter, August 2008, by Mark Heschmeyer

A large number of domestic lending institutions reported to the Federal Reserve Board that they have tightened their lending standards and terms on all major loan categories in the past three months.

In addition, a number said they expected to continue to do so through the rest of year and some into 2009, according to the generally hard-faced set of opinions reported in the Fed’s July 2008 Senior Loan Officer Opinion Survey on Bank Lending Practices.

While standards are being tightened, demand for loans from both businesses and households at domestic and foreign institutions has also weakened, on net, over the past three months.

Almost every U.S.-based commercial real estate lending bank has tightened the vice on money. About 80% of domestic banks-a fraction similar to that in the second quarter survey-reported having tightened their lending standards on commercial real estate loans in the past three months.

However, lenders across the seas have started loosening the screws. About 35% of foreign banks-down from roughly 55% in the April survey-also indicated that they had tightened their lending standards on commercial real estate loans.

Regarding demand for these types of loans, about 30% of domestic banks and 45% of foreign institutions-fractions somewhat smaller than those in the April survey-reported weaker demand for commercial real estate loans over the survey period on net.

About 70% of domestic and 45% of foreign respondents said they believed that their institutions would tighten their lending standards on these loans in the second half of 2008, and roughly 50% of both domestic and foreign banks anticipated doing so in the first half of 2009.

Business Lending. About 60% of domestic banks-a slightly larger fraction than in the April survey-reported having tightened lending standards on commercial and industrial (C&I) loans to large and middle-market firms in the past three months. And about 35% of U.S. branches and agencies of foreign banks-down from about 60% in the April survey-indicated that they had tightened their lending standards on C&I loans in the past three months.

The July survey pointed to a further weakening of C&I loan demand in the past three months. Substantial majorities of domestic institutions that experienced weaker loan demand in the past three months cited a decrease in customers’ needs to finance investment in plant or equipment as well as firms’ decreased need to finance inventories.

Concerning loans to businesses, about 55% of domestic and 45% of foreign respondents indicated that they expected their banks to tighten credit standards on C&I loans in the second half of this year, and about 45% of domestic and 30% of foreign institutions, on net, anticipated tightening their lending standards on these loans in the first half of next year.