Research and Statistics

Lending standards keep tightening, Fed says


It didn’t get any easier to borrow on credit cards at the start of this year, based on the Federal Reserve’s quarterly loan officers’ survey released today.

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It didn’t get any easier to borrow on credit cards at the start of this year, based on a Federal Reserve survey released today.

Credit card lending standards
continue to tighten
Banks are continuing to make it harder for consumers to get credit cards, with about 60 percent of issuers saying they’ve tightened credit card loan standards. The number saying they’ve tightened standards on other consumer loans is still high, but not in comparison to credit cards.

Quarterly loan officer survey from the Federal Reserve

That’s because banks remained cautious about extending credit card loans in the early months of 2009, according to results from the latest Federal Reserve survey of senior loan officers, as more than half of respondents again acknowledged tightening their credit card lending standards in the first three months this year.

“Nothing really changed with regards to credit cards. Things were about the same with no real easing going on,” says Marisa Di Natale, senior economist with Moody’s in West Chester, Pa.

The survey showed that borrowing on credit cards was tougher than securing other forms of consumer loans. The percentage of U.S. banks saying they tightened their credit card lending standards remained relatively unchanged from the February loan officers’ survey, which looked at the last three months of 2008, even while the percentage that reported tightening their policies on other consumer loans actually decreased. Based on the Fed’s survey, nearly 60 percent of banks say they tightened credit card lending standards in the first quarter. Meanwhile, consumers’ credit scores took on greater importance, with about half of banks saying they “reduced the extent to which credit card accounts were granted to customers who did not meet their bank’s credit-scoring thresholds.” Additionally, “Roughly 55 percent of the respondents, a somewhat higher proportion than in the January survey, reported having raised minimum required credit scores on credit card accounts over the previous three months.”

At the same time, credit card limits were increasingly trimmed, as “about 65 percent of banks, compared with 45 percent in the January survey, indicated that they had lowered credit limits to either new or existing credit card customers.”

Analysts say banks in a tough spot
While the Fed continues to watch for signs that its more recently introduced initiatives have encouraged consumer lending, analysts expressed little surprise that cardholders found it difficult to secure loans. “I think it’s pretty clear that banks continue to focus on protecting themselves from further credit losses,” says Keith Davis, a research analyst with Farr, Miller and Washington in Washington, D.C. “Considering the regulatory backdrop — which continues to become more onerous — they are not able to price for risk at they have in the past.”

“It may be that in Q1 of this year there was more deterioration in credit cards than other types of loans. So it may be that credit cards are being viewed as more risky by banks,” Di Natale says.

Banks, experts foresee further challenges

Recent data show that banks have reason to worry about risk. Reuters today reported that credit bureau Equifax said 4.7 percent of payments on bank-issued credit cards were at least 60 days late in March, an increase of 38.3 percent over March 2008. Asked about their expectations for credit card charge-offs and delinquencies in 2009, about 77 percent of banks say that loan quality for plastic is likely to “deteriorate somewhat” this year, while nearly 13 percent say that credit card loan quality is likely to “deteriorate substantially.” Charge offs occur when lenders conclude they are unable to collect a debt and remove it from their financial accounts, while delinquencies involve credit card accounts that are more than 30 days past due.

Experts say that Fed initiatives aimed at boosting lending, like the Term Asset-Backed Securities Loan Facility (TALF), could prove themselves in the second-quarter survey of senior loan officers. “It will be interesting to see what, if any, effect that has. And that should show up in the next report,” Di Natale says.

Still, lenders won’t have an easy time making everyone happy. “Banks are faced with a conflicting set of objectives here,” Davis says, noting that regulators have tasked them with both strengthening their own balance sheets even as they lend freely. “It’s impossible to achieve both those things. When you are short capital, you’re not going to go out and extend a ton of loans,” he says.

See related:Fed report: Banks continue to tighten lending standards, $200 billion in ‘TALF’ funds ready to revive consumer lending, House OKs Credit Cardholders’ Bill of Rights

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