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U.S. Banks Are Still Shrinking Their Loan Books

The research staff Federal Reserve reaches out to bank senior loan officers every three months, to get a feel for the markets in lending to business, commercial real estate, home mortgages and credit cards. Like so many economic data points this year, the October 2009 survey tells us that while lending conditions are not really improving, they are "less bad." It's getting easier to find a prime home mortgage, but in general banks are still trying to avoid risk, and charging more for the loans they do extend. Wasn't the role of the TARP, et alia, to overcome the fear to lend? The banks also say, though, that customers aren't lining up for new credit.

The most recent senior loan officer survey included 80 banks, of which 57 are U.S. based, and 23 are branches of institutions based overseas. (The results of the survey are reported as a net percentage of institutions, so if 40 percent of banks say they're tightening and 20 percent are easing, the statistic is a net 20 percent tightening.)

In lending to businesses, known as C&I loans, 15 percent of banks in the October survey said they had tightened their lending standards, as they had reduced their tolerance for risk. That's an improvement from the 80 percent that had tightened terms in the year-ago survey and the 30 percent reporting cutting back in July, but only six banks reported that they had eased their terms on C&I loans.

Forty percent of banks said they're charging C&I customers higher loan spreads.

About a net third of banks reported ongoing decreases in C&I loan demand, which go toward funding businesses' investments in inventory, receivables from customers, and equipment. In the Fed's words:

[D]ecreased originations of term loans and decreased draws on revolving credit lines were cited by 45 percent and 30 percent of banks, respectively, as "very" important sources of the decline in C&I loans this year.
The graph below, from the St. Louis Fed, shows the history of C&I loans since 1980, and shows a recurring trend that I didn't expect to see -- rather than surge early in recoveries, loans to businesses tend to contract for several years, so maybe the current conditions are not so unusual.

A quarter of banks said they had tightened standards on home mortgages, but the Fed noted that demand for mortgages had strengthened (although by how much they didn't say).

The picture in credit card lending is probably a greater concern. Sixteen percent of banks say they have tightened their standards for new accounts, and none reported easing up. One third said they had cut back credit limits, increased interest rates, and raised customers' required credit scores. About a quarter reported that demand for consumer loans was moderately weaker, and eight percent said it had weakened substantially.

In February 2010, a new law called Credit CARD will become fully effective - that's the one that requires banks to tell you when they are changing the interest rate, and so forth. Half of banks responded that they expect the new rules to lead them to further restrict credit card lending next year.

I don't believe that the Frugal America hypothesis holds much water, but might it turn out that when people are back to work and want to spend again, the frugality will be forced on us by the banks? I'm going to sign off now, and buy a new TV while I still can.

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