Banks Stingier With Loans To Consumers, Businesses

Banks in the United States kept tightening lending standards and terms for both business and consumer loans over the past three months out of concern about a weakening economic outlook, according to a Federal Reserve survey.

The April survey of senior loan officers at 56 domestic banks and 21 U.S. branches and agencies of foreign banks also underlined that demand for loans from businesses and consumers was weaker -- though not as markedly as in January.

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"Substantial majorities of domestic and foreign respondents pointed to a less favorable or more uncertain economic outlook and to a worsening of industry-specific problems as reasons for tightening their lending standards on C&I (commercial and industrial) loans over the past three months," the Fed said.

Fed policy-makers may have had the outlines of the loan officers' report when they decided last week to reduce official interest rates another quarter percentage point.

At the time, the Fed hinted it might halt its rate-cut campaign while it assesses whether the 3.25 percentage points by which it has lowered rates since September will spur growth.

The loan survey shows the tight lending continues to be a problem for the U.S. economy, which has grown at only a 0.6 percent rate during each of the last two quarters due to the drag from a deep housing crisis.

"About 35 percent of domestic banks and 45 percent of foreign institutions -- somewhat larger fractions than in the January survey -- noted that concerns about their banks current or expected capital position had contributed to more stringent lending policies over the last three months," the Fed said.

The U.S. central bank, and its counterparts in major industrial economies around the world, have taken a variety of measures to pump liquidity into the banking system while policy-makers have urged financial institutions to keep lending.

Reduced lending potentially worsens any deceleration in the broader economy because restricts credit businesses need to for investment such as new equipment and consumers need for purchases such as new homes.

The survey cited, as a reason for reduced loan demand, less need on the part of banks' customers to finance investment in plant and equipment or to carry inventories.

"All foreign respondents noted a decrease in customers' needs for merger and acquisition spending," the Fed said.

Some 80 percent of U.S. banks and 55 percent of foreign banks -- about the same proportions as in January -- said they were imposing tougher standards for making commercial real estate loans than they had been in the prior three months.

A majority of banks were also toughening standards for not only prime mortgage loans but also for so-called non-traditional and subprime residential mortgages.

Some 65 percent said that there was less demand for subprime loans, the type made most frequently to borrowers with spotty credit records.