Shellshocked Banks Now Cutting Back on Good Loans, Too

As struggling banks continue to sag under the weight of all the dumb-arse loans they’ve made in recent years, they’re now clamping down on smart loans, too. The NYT reports that the collective volume of commercial and industrial loans and non-collateralized commercial paper is down 3% this year. The result is that about $150 billion in credit has vanished from the market and this is killing investment and growth NYT:

According to a survey of senior loan officers conducted by the Federal Reserve in April, 55 per cent of American banks tightened lending requirements for commercial and industrial loans to large and midsize companies — up from about 30 per cent in the previous survey, in January. About 70 per cent of the respondents said they have made such loans more expensive.

“Banks will be much more cautious and keep raising the bar, and that will lead to an outright decline in total commercial and industrial loans,” predicted Stuart G. Hoffman, chief economist at the PNC Financial Services Group in Pittsburgh. “Banks clearly have to rebuild their capital base. They’re going to look a bit more nervously before they make those loans.”

Prior to the credit crunch, before the secondary market for loans had collapsed, banks would often sell the majority of their loans, leading to lax lending standards. Now that the secondary market has all but disappeared, banks are jittery about who they do and don’t lend to. The result is an economy, already struggling from softening consumer spending, with a decreasing pool of capital with which to finance new expansion.

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