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Borrowing costs swell as banks clamp down

NEW YORK – STUNG by billions of dollars in bad debts, banks in the United States are clamping down on loans, making borrowing costlier for the consumers and companies that are the best hope for keeping the US economy out of recession.

Economists are increasingly worried that reluctant banks plus skittish borrowers will create a recipe for economic disaster, and even aggressive interest rate cuts by the Federal Reserve may not be enough to prevent a downturn.

‘It’s a vicious cycle. As banks tighten lending standards, credit is harder to get, which is worse for the economy, and that makes banks tighten up more,’ said Mr Ray Soifer, the chairman of bank consulting firm Soifer Consulting.

‘Fed rate cuts will have some impact, but cutting rates by itself does not improve the availability of credit.’

The central bank’s Beige Book survey of economic conditions, released on Wednesday, showed that both business and consumer lending activity slowed from mid-November up till last month, with most regions reporting tighter credit conditions.

Banks have reason to be concerned about credit quality as US consumers struggle to stay current on a growing pile of debt.

American Express, which traditionally focuses on wealthier consumers less exposed to an economic slowdown, said that delinquencies suddenly ticked up last month.

Citigroup – which is raising at least US$14.5 billion (S$20.7 billion) of new capital, with US$6.88 billion of this coming from the Government of Singapore Investment Corporation – said fourth-quarter credit costs for US consumer loans jumped because of rising delinquencies in credit cards, mortgages and car and personal loans.

Borrowers with clean credit histories will still find lenders willing to push money their way, but the easy money that kept the economy rolling in recent years has dried up as banks, hobbled by the US sub-prime mortgage mess, scramble to shore up their balance sheets.

Deutsche Bank estimates that losses from sub-prime mortgage loans will reach US$300 billion to US$400 billion, of which one-quarter will probably fall on the banking sector.

‘We are more optimistic than some observers who have predicted a major credit crunch because of write-offs on sub-prime loans,’ the German bank’s analysts wrote in a note to clients.

They added: ‘But we expect the balance sheet repairing process to reduce banks’ inclination to extend new credit, resulting in higher lending rates and tighter lending standards.’

There are already subtle signs that consumer credit terms are tightening, and that could be particularly painful for the US economy as consumer spending accounts for more than two-thirds of the country’s economic activity.

Credit card issuers are mailing out fewer solicitations, according to Credit Suisse. The credit card industry mailed out 595 million offers in November, 3 per cent lower than in October and 11 per cent below the figure a year ago.

Loans from car dealers have not kept pace with the Fed’s interest rate cuts. The average interest rate on new car loans was higher in November than it was in August, even though the Fed lowered benchmark overnight rates by three-quarters of a percentage point over that period.

On the corporate side, loan volume for companies with high credit ratings remains robust, in part because businesses are relying less on other funding avenues, such as commercial paper.

But junk-rated companies are expected to borrow less this year than they did last year, because banks and investors are much less interested in taking that risk.

 

Source: REUTERS (The Straits Times 18 Jan 08

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