Why Banks Aren't Lending

(MoneyWatch)  (This is an update to a popular post from November 12, 2009. Also see this post from February 5, on why businesses aren't hiring.)
Covering the final quarter of 2009, the Fed has published its Senior Loan Officer Opinion Survey on Bank Lending Practices (I'll refer to it as the January 2010 Survey). There are some positive aspects, in that bankers are not getting tougher on borrowers, but few are loosening the purse strings either. The bankers are looking for the health of businesses, both large and small, to pick up, but are negative on how home mortgages, even those of top grade, will perform this year. It's not a very encouraging report.

Here's the Fed's summary of its survey of 55 domestic banks and 23 banks with parents overseas:

The January survey indicated that commercial banks generally ceased tightening standards on many loan types in the fourth quarter of last year but have yet to unwind the considerable tightening that has occurred over the past two years. The net percentages of banks reporting tighter loan terms continued to trend lower. Banks reported that loan demand from both businesses and households weakened further, on net, over the survey period. (The emphasis is mine.)

The graph below shows how sharply banks have cut lending, in spite of the heroic measures taken on behalf of U.S. taxpayers:


Although tightening in general has stopped, one area where banks continued to restrict lending is commercial real estate. Banks have raised the bar in terms of interest rates they charge (77 percent indicating tightening), loan size (50 percent) and maturity (32 percent), as well as debt-service coverage ratios and loan-to-value ratios (about 70 percent for each).

Banks have not tightened on commercial and industrial business loans, known as C&I loans; in fact their outlook on lending to businesses is better than on the consumer side. But they also report weak demand -- about half say requests from medium and large companies is down, while a third report weakness from small businesses. They don't need to finance growing receivables, inventory or equipment.

Banks also have continued to restrain residential mortgage loans -- about 10 percent of large banks, and one-quarter of other banks, said they had made it tougher to get even a prime mortgage, even though 17 percent (of large banks) and 26 percent (of small banks) had seen increases in demand during the final quarter of 2009.

Only a few banks said they were getting tougher on credit card approvals. About 40 percent, however, said they were cutting back credit limits on existing accounts, and about 20 percent reported raising credit card interest rates.

A substantial share of bankers are not optimistic about the quality of their loan books going forward -- that is, whether borrowers will be making the payments they should. About one-fourth of lenders expect business loans to deteriorate, and about 40 percent expect prime home mortgages to get worse. Of course, that means a number greater than that expect quality to hold steady, or improve. But the "clearly improving" camp is still in the minority.

OK, so banks are slowing how much they are restricting lending, but that's not a very positive outlook. It squares with the earnings reports we've seen so far, which I wrote on yesterday, in that old-economy businesses are not doing so well, and tech-oriented firms, which typically don't have to borrow as much as old-line industrials, are faring better.

The poor outlook on mortgages -- continuing deterioration, even on prime home loans -- also suggests that bankers don't expect employment to improve much any time soon. And that view is logical, based on what they see in the businesses they serve.

The Atlanta Fed recently surveyed small businesses in its region, and found that about a third of businesses planned to increase spending over six to 12 months, and about 40 percent would stay at the same level, suggesting rising demand for loans. But they can't be certain either, conceding that their results probably raise more questions than answers.