Financial Update (First Quarter 2008)

Fed Survey Shows Tightening Bank Lending Standards

survey graphicLending standards and terms for a broad range of loan types tightened during the fourth quarter of 2007 at both domestic and foreign banks, according to the most recent Senior Loan Officer Opinion Survey on Bank Lending Practices conducted by the Federal Reserve Board. During the survey period, the demand for bank loans from both businesses and households weakened.

Tighter standards, weaker demand for all loan types
For both commercial and industrial (C&I) loans to firms and commercial real estate loans, significant shares of domestic and foreign banks reported that they tightened their lending standards and price terms and increased spreads of loan rates over their cost of funds in the previous three months. Many banks reported weakening demand for commercial real estate loans, and to a lesser extent, for some types of C&I loans.

Summary of January 2008 survey off-site image
Full January 2008 survey (with tables and charts) off-site image

For residential mortgage loans, a majority of banks tightened their lending standards and reported weaker demand for all types of mortgages but especially nontraditional and subprime loans.

Most domestic banks also tightened their standards for approving applications for revolving home equity lines of credit, and many said that demand for such credit had weakened.

Some banks also tightened lending standards for credit card loans and other types of consumer loans while also reporting weaker demand.

As reasons for more restrictive lending policies, institutions pointed to a less favorable or more uncertain economic outlook; a reduced tolerance for risk; a worsening of conditions for particular industries or in particular markets; and, in some cases, a deterioration of current or expected capital or liquidity positions.

Mitigating losses on residential mortgage loans
A set of special questions queried domestic banks about strategies they expect to employ to mitigate potential deterioration in the credit quality of their residential mortgage loan portfolio or of mortgage loans they service for others. Potential mitigation strategies banks cited include loan-by-loan modifications based on individual borrowers' circumstances; steps, such as short sales or deed in lieu of foreclosures, in which borrowers lose possession of their house; refinancing loans into other mortgage products; and streamlined loan modifications.

February 27, 2008