Financial Update (First Quarter 2009)

Fed Survey Shows Tightened Bank Lending Standards in 2008

photo of a man writingConsumers and businesses had a harder time obtaining credit in the fourth quarter of 2008 as banks reported tightening lending policies, according to the January 2009 Senior Loan Officer Opinion Survey on Bank Lending Practices conducted by the Federal Reserve Board.

Commercial, industrial loans see tightening
The survey, covering 53 domestic banks with combined assets of $6.2 trillion and 23 foreign banks, said nearly two-thirds of domestic banks reported having tightened lending standards on commercial and industrial (C&I) loans to large and middle-market firms over the preceding three months. This percentage was down from the reported tightening in the October 2008 survey but still above the previous peaks reported in 1990 and 2001.

Nearly 70 percent of domestic survey respondents said they had tightened standards on C&I loans to small firms, a figure that was only slightly lower than that found in the October survey. Most respondents reported having charged premiums on riskier loans and increasing the cost of credit lines to firms of all size during the survey period.

Summary of January 2009 survey off-site image
Full January 2009 survey (with tables and charts) off-site image

On balance, about 80 percent of domestic banks reported they had tightened their lending standards on commercial real estate loans in the last quarter of 2008, down slightly from the roughly 85 percent that reported doing so in the October 2008 survey.

Uncertain outlook a key factor in tightening
All of the survey's respondents cited an unfavorable or uncertain economic outlook as a reason for tightening lending standards and terms on C&I loans over the preceding three months. Most respondents also cited worsening of industry-specific problems and reduced tolerance for risk as important factors.

Banks that experienced weaker loan demand cited decreases in their customers' needs to finance aspects of their business such as investment in plants and equipment, mergers and acquisitions, and inventory.

Residential real estate lending also feels the squeeze
Smaller though substantial fractions of domestic respondents reported tighter lending standards on prime and nontraditional residential mortgages, with about 45 percent of respondents indicating tightened standards. Almost half of the 25 responding banks that originated nontraditional residential mortgage loans over the survey period reported having tightened standards on such loans.

About 10 percent of domestic respondents saw weaker net demand for prime residential mortgage loans over the survey period, significantly down from the roughly 50 percent that reported weaker demand in the October survey.

February 19, 2009