Fewer banks tightened lending standards last quarter, Federal Reserve says
Fewer U.S. banks tightened lending standards for companies and consumers in the third quarter as the economy grew for the first time in more than a year, a Federal Reserve survey showed.
Demand for most types of loans weakened at a smaller number of banks than in the second quarter, the Fed also said Monday in its quarterly Senior Loan Officer survey. For prime residential mortgages, a larger number of banks reported stronger demand, the central bank said.
The report helps explain why Fed policymakers last week said "tight credit" remains a drag on the economy and pledged to keep their benchmark interest rate near zero for an "extended period." JPMorgan Chase & Co. is among the banks that have reduced lending in response to stricter underwriting standards for consumer loans and lower demand from companies.
"It will be helpful if the banks were more prepared to lend, because there are creditworthy borrowers that are having difficulty getting credit," said Brian Bethune, chief financial economist at IHS Global Insight.
The survey of loan officers at 57 U.S. banks and 23 U.S. branches of foreign banks was conducted from about Oct. 6 to Oct. 20, the central bank said. The report doesn't identify respondents.
Loans and leases held by U.S. commercial banks have declined for 10 straight months, falling to $6.7 trillion as of Oct. 28 from $7.2 trillion at the end of 2008, according to a separate statistical release from the Fed.
Commercial and industrial loans have dropped to $1.37 trillion from $1.6 trillion, commercial real-estate loans have declined to $1.66 trillion from $1.72 trillion, and consumer loans have fallen to $847 billion from $857 billion at the end of last year.
In response to a question on the decline in commercial and industrial loans, banks cited lower originations of loans and decreased draws on revolving credit lines as the two most important reasons for the drop.
About a net 15% of banks tightened standards on commercial and industrial loans, half of the prior survey and below the peak of about 80% a year ago, the Fed said. Also, about a net 15% of respondents said they tightened standards for credit-card loans, the smallest since April 2008 and down from 35% in the July survey.
Banks were extending commercial real estate loans more often than refinancing them, the Fed survey showed. About 75% of U.S. banks reported extending more than one-fourth of construction and land development loans that were scheduled to mature by September.
Last month, the Fed and other regulators urged commercial real estate lenders to "work constructively" to arrange modifications with borrowers who show a willingness to repay debt posing the biggest threat to the U.S. banking industry. Loan originations by the biggest U.S. banks receiving government assistance fell by 17% in August from a month earlier, the Treasury Department said Oct. 15, the most recent report.
In its monthly survey of lending by the top 22 recipients of capital injections from the $700 billion Troubled Asset Relief Program, the Treasury also said total loan balances fell by 1% in August from a month earlier.
Loans at JPMorgan Chase in New York fell to $653.1 billion at the end of the third quarter from $761.4 billion a year earlier. The decline reflected "some tightening of underwriting standards" on consumer loans, including credit cards, Chief Financial Officer Michael Cavanagh told analysts during an Oct. 14 call following the release of the quarter's results. Loan demand from companies also fell, he added.
Bank of America Corp.'s loans and mortgages shrank to $878.4 billion from $922.3 billion a year earlier. The drop was due to "lower consumer spending and a resurgence in the capital markets" that allowed corporations to issue bonds and equity to pay off debt, Kenneth Lewis, chief executive officer of the Charlotte, N.C., said on an Oct. 16 conference call with analysts after the third-quarter report.
Employers continued cutting jobs even after the economy expanded at a 3.5% annual pace in the third quarter. The unemployment rate rose above 10% last month for the first time since 1983, a Nov. 6 Labor Department report showed.