You can scream at banks for not lending out the money taxpayers gave them to save the economy, but, to be fair, you should also note that the demand for that money is low.
Of course, demand may be low because banks have tightened their standards so much and are charging an arm and a leg for the loans they do make (while getting taxpayer-subsidized cheap money from the government).
Here’s the bottom line of the Federal Reserve’s quarterly survey into bank lending standards:
- Banks are still tightening their lending standards, albeit at a declining rate
- Loan pricing is still high
- Loan demand is recovering but still low
- Banks expect to maintain above-average lending standards at least through mid-2010, especially on sub-prime borrowers.
The last bullet does not support the theory that consumers are suddenly going to be able to lever up again, powering the economy to a v-shaped recovery. Asha Bangalore at Northern Trust:
The excerpt from survey that is troubling runs as follows: “In response to a second special
question, most banks reported that they expected their lending standards across all loan
categories would remain tighter than their average levels over the past decade until at least the
second half of 2010; for below-investment-grade firms and nonprime households, the expected
timing is later, with many banks reporting that standards for such borrowers will remain tighter
than average for the foreseeable future.” The credit machine is the life blood of a modern
industrial economy. This response leads one to reconsider the prediction about the growth path of
The reasons bankers gave for tightening credit standards or terms for C&I loans not only matched
those reported in the previous two surveys but also enhance the concerns cited above – “Both
domestic and foreign respondents nearly unanimously cited a less favourable or more uncertain
economic outlook, and large majorities cited a reduced tolerance for risk. Domestic respondents
also widely noted a worsening of industry-specific problems, while foreign respondents were
more likely to cite an increase in defaults by borrowers in public debt markets, as well as
deterioration in their banks’ current or expected capital positions.”
And here are some of Asha’s summary charts and analysis:
Banks are still tightening lending standards for consumer and corporate loans, but far fewer banks are tightening than a few quarters ago.
Banks are still increasing their prices for these loans, despite a decrease in bond-market spreads. This may explain why loan demand is low. (It may also explain why bank profitability is so high, especially given that the government is subsidizing bank funding).
Loan demand is still low. This is likely a function of consumers deleveraging and companies being cautious–combined with tighter lending standards and higher pricing.
Banks are still tightening mortgage-lending standards, even for prime mortgages. The net tightening is much less pronounced than it was last year, but it’s still not good news for the housing market.
Banks are still tightening terms on credit cards and other consumer loans. Again, a much slower rate than last year, but not good news for consumer spending.
Banks “willingness” to lend to consumers is returning to normal…as long as the consumers are willing to pay high prices for the money and meet stringent borrowing requirements.
See Also: The Three Kinds Of Economic Recovery
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