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Research and Statistics

Fed report: Banks continue to tighten lending standards


Banks remain hesitant to extend credit to consumer borrowers, according to the results of the fourth-quarter 2008 Federal Reserve survey of senior loan officers.

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Banks remain hesitant to extend credit to consumers, according to the results of the latest Federal Reserve survey of senior loan officers, with more than half of lenders saying they tightened their credit card lending standards in the last three months of 2008.

Credit card lending standards
continue to tighten
Quarterly loan officer survey from the Federal Reserve

That meant consumers looking to borrow had a tough time. “Large fractions of domestic banks continued to report a tightening of policies on both credit card and other consumer loans over the past three months,” the survey says. “Nearly 60 percent of respondents indicated that they had tightened lending standards on credit card and other consumer loans, about the same fractions as in the October survey.”

See related: Previous quarterly loan officers survey

All of this comes even after the federal government loaned banks billions of dollars to jump-start the floundering economy. The loans were intended to prod banks into lending more money, but at least for the fourth quarter of 2008, didn’t appear to make much difference.

Bad credit consumers had it especially rough. More than half of banks surveyed (55 percent) were less willing to offer credit cards and other consumer loans to borrowers with poor credit histories, denying credit to consumers “who did not meet credit-scoring thresholds.” Additionally, just under half of respondents (approximately 45 percent) said they raised minimum credit score requirements, which was nevertheless down slightly from the October survey.

Still, the rate at which banks lowered credit limits slowed somewhat: About 45 percent of banks trimmed credit limits for new or existing cardholders. When polled in October, 60 percent of banks that admitted lowering credit limits. For existing accounts, about 40 percent of banks cut home equity lines of credit, while about 35 percent cut account limits on credit cards.

Consumer advocates say that this approach is sensible for banks, provided they take the consumer into account. “If done carefully, it’s quite responsible to limit lines in this economy,” says Linda Sherry, national priorities director for nonprofit education and advocacy group Consumer Action. “But we have heard from so many people who were moved close to their existing balance, or who were subject to repeated lowering of limits, that we have concluded that banks need to be far more sensitive to the individual accounts when making such changes.”

Economists not surprised by survey results

Those stricter standards didn’t phase analysts. “Tightening standards on credit lines and credit cards specifically does not surprise me,” says William Pittenger, senior vice president and chief economist with Seacoast National Bank.

Pittenger says the tightening of credit is a national reaction by banks faced with an uncertain economy, including rising unemployment numbers. That doesn’t mean it’s necessarily right, however.

“I think some of it is not especially warranted, either,” Pittenger says, noting that banks that use geographic information (such as home foreclosures in a given region) are unable to take into account individual borrower information. Still, “in defense of the card companies, they probably can’t,” Pittenger says, citing the huge volume of borrowers that banks are responsible for.

Other experts also see the latest data as part of a trend. While graphs of the latest Fed data show that tight lending standards have come down somewhat from earlier peaks, “it doesn’t mean credit conditions are getting better,” says Robert Dye, senior economist with PNC Financial Services. “It just means they aren’t getting worse as fast as they were earlier this year,” Dye says.

Dye says credit is more accessible than it was — although that doesn’t mean it is easy to borrow. “The rate of tightening that we had last fall after the collapse of Lehman Brothers was unprecedented in this survey. It is certainly within expectations to see that rate of tightening decrease,” he says.

Banks will likely remain stingy with credit for many months. “Economic conditions need to see some improvement, financial markets need to stabilize,” Dye says. Until financial policy addresses toxic debt at banks and other financial institutions and currently changing banking regulation reaches a resolution, “this is going to contribute to a conservative approach by banks,” he says.

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