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European Crisis Hits US Bank Lending

Robin Harding
Tuesday, 8 Nov 2011 | 1:55 AM ET

The crisis in Europe has begun to spill over into US bank lending, according to the latest survey of loan officers by the US Federal Reserve.

CNBC.com

Credit conditions have steadily eased since the end of the recessionbut that process almost ground to a halt in the last three months, with only five domestic banks out of 50 saying that they relaxed their standards for lending to large companies. Two banks had tightened conditions.

There was also a sharper retrenchment by US branches of foreign banks: 23 percent of such operations tightened their lending terms, raising their interest rate spreads and cutting back on the amount and period for which they are willing to lend.

Of the foreign banks that tightened their lending conditions in the US, all nine pointed to a weaker economic outlook, while a majority said they had a lower tolerance for risk, that their own liquidity position was weaker, and that it was harder to sell loans on the secondary market.

The survey illustrates one of the main channels by which the European crisis could spread to the US and shows that some ripples have already crossed the Atlantic.

“Overall, the report underscored the fallout from the heightened global economic and financial market uncertainties that prevailed in the period following the downgrade of the US debt by S&P in early August,” noted Millan Mulraine at TD Securities in New York.

There were some encouraging signs in the details of the report. Fifty percent of US banks eased the spread that they charge over their own cost of funds for commercial loans and 30 percent reported stronger demand for mortgages.

The Fed’s senior loan officer survey shows that in the three months to October banks took steps to protect themselves from the European debt crisis,” noted Paul Dales at Capital Economics in Toronto. “Nevertheless, the survey is still consistent with a modest expansion in actual domestic bank lending.”

But there was some evidence US banks were cutting back on lending to European banks and companies in a feedback loop that could make economic conditions in Europe worse.

In a special survey question, 23 percent of US banks said they had tightened conditions for lending to companies with significant exposure to Europe, and 56 percent said that they had tightened conditions for lending to European banks.

European banks are at the heart of concerns about sovereign debt because of fears that they cannot survive any kind of default by the government of their home country. A shortage of dollar liquidity in Europe forced the Fed to extend dollar swap lines with the European Central Bank in September.

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