Federal Reserve bank officer survey shows standards continue to tighten

The Federal Reserve just released its latest figures on credit standards and credit demand. 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 Q3 2008 survey was conducted in July; 52 domestic banks and 21 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?

* Residential mortgage credit was tougher to get all around. The Fed began breaking out tigthening/loosening figures for three sub-categories of mortgage — prime, nontraditional, and subprime — in Q2 2007. Some 74% of those surveyed this time around said they are tightening standards on prime mortgages, up from 62.3% in Q2 2008. A net 84.4% of those surveyed said they were cracking down on nontraditional financing, up from 75.6%, and a net 85.7% said they were tightening on subprime loans, up from 77.7% a quarter earlier.

The subprime and prime figures are records. The nontraditional number is just shy of the high (84.6% in Q1 2008). The previous record for the all-mortgage category was 32.7% in Q1 1991.

* The tightening trend is spilling over into commercial real estate. A net 80.7% of respondents said they were tightening standards on CRE loans. That was up from 78.6% a quarter earlier and the highest on record (Fed data goes back to 1990).

* Consumer credit figures tell a similar story. Some 66.6% of lenders said they were tightening standards on credit card borrowers, up from 32.4% a quarter earlier and the highest on record (The data in this category goes back to 1996). Fed figures show that 67.4% are also tightening standards on other consumer loans, up from 44.4% (another record).

* C&I customers can’t catch a break either. Lastly, banks are tightening standards and raising the cost of the loans they do make for commercial and industrial customers. A net 57.6% of banks are tightening standards for large and medium sized borrowers, up from 55.4% a quarter earlier and the highest since Q1 2001. 80.8% said they were raising the spread over their cost of funds that they charge large and medium sized borrowers for access to money. That was up from 71% a quarter earlier and the most ever.

These days, you practically need the Jaws of Life to pry open a banker’s wallet. That’s the message from the latest Fed survey on bank lending standards It showed that record-high percentages of lenders are tightening standards on residential mortgages, commercial mortgages, credit cards, and consumer loans. Businesses are also finding it tougher and costlier to borrow.

It’s easy to see why banks are so stingy. They went overboard during the housing bubble, leaving them vulnerable to large losses on previously issued home mortgages. Unfolding downturns in other sectors, like autos and commercial real estate, are starting to drive up delinquencies in other parts of their loan portfolios, too. Overall, the longer the crunch lingers, the longer the economic slump could drag on.

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