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Research and Statistics

Banks continue to ease lending standards, Fed survey shows


Banks continued to make it easier for consumers to get a credit card in late 2010, a new Federal Reserve survey shows. The news wasn’t as good for current credit card holders, though.

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Banks continued to make it easier for consumers to get a credit card in late 2010, a new Federal Reserve survey shows.

The news wasn’t as good for current credit card holders, but signs of banks’ economic optimism found in the survey might bode well for all consumer borrowers in 2011.

The Federal Reserve’s latest quarterly survey of senior loan officers, released on Monday, showed that banks became somewhat more willing to extend credit to new cardholders in late 2010. This survey’s results were similar to the previous quarter’s, continuing a shift from the depths of the recession, when banks avoided lending at even the slightest sign of risk.

“Everybody’s a bit timid, but the trends are going in the right direction,” says Dennis Moroney, research director in the bank cards division with advisory services firm TowerGroup.

Economists say the increase in lending to new borrowers isn’t surprising, since that group was hit hard by banks during the recession. “They tightened up very drastically on new card issuance, and at some point, you’ve got to loosen that up or credit card holders die on you as a result,” says David Wyss, chief economist with Standard & Poor’s in New York.

To create its quarterly survey, every three months the Fed requests feedback from banking executives about changes in the supply and demand for loans to businesses and households over the previous quarter. The latest survey included responses from 57 domestic banks and 22 U.S. branches and agencies of foreign banks.

What changed

In response to questions about changes to terms and conditions for new or existing cardholders over the past three months:

  • About 13 percent of banks said approval standards for credit cards eased, while only 2.5 percent tightened them.
  • About 11 percent of banks decreased credit card limits on new or existing cardholders; an equal number said they increased them.
  • Twice as many banks (10.8 percent) decreased credit card limits for existing cardholders as increased them.
  • About 14 percent of banks reduced the minimum credit score required to get a card. That’s more than double the number (5.4 percent) that raised the requirement
  • About 8 percent of banks increased business credit card limits, while 5.1 percent decreased them.

Wyss notes that the bulk of banks didn’t change their lending much in the fourth quarter, with small banks making fewer adjustments than large banks. Small banks were “not quite as carried away with excessive lending during the good years,” Wyss says.

The Fed also included a set of special questions focused on banks’ outlook for 2011, which indicated that lenders expect fewer unpaid loans this year. More of than half the banks surveyed — 56.8 percent — said credit card loan quality is likely to improve in 2011, while just 2.7 said it is likely to deteriorate.

That’s a bright outlook on the part of banks.

Other analysts have also been predicting that more borrowers will make on-time payment this year, resulting in fewer losses for banks. “Looking ahead to 2011, we expect charge-offs will continue to decline,” said Moody’s Investors Service in a Jan. 25 report, referring to unpaid loans that banks give up on collecting.

Economic and employment woes caused a spike in delinquencies, but things appear to be settling down. That’s allowing banks to get back to the business of lending.

“People always overreact when these things happen. That’s a rational thing to do,” says Wyss. Now, however, when it comes to banks, “they’re getting back to more normal,” he says.

See related:  Banks loosen credit card lending standards, Fed report says, Consumer credit card debt falls further in November

The chart below shows the percentages of banks that tightened specific lending standards for new credit card applications in the fourth quarter of 2010 and in the second quarter of 2008, when credit tightening was at its peak. The chart also shows the percentage of banks who said they took certain specific actions regarding new and existing credit card accounts.
ActionQ4 2010Q2 2008
For new applications
Loosening overall lending standards12.5%0%
Tightening overall lending standards2.5%66.6%
For new applications and existing accounts
Lowering credit limits10.8%47%
Raising minimum payments5.4%10%
Raising credit score requirements5.4%57%
Refusing to lend to those who don’t meet all lending standards0%50%

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