(NEW YORK) The Federal Reserve said it became tougher for US companies and consumers to get loans in the past three months, particularly to buy real estate.
Most lenders anticipate more delinquencies and losses this year, assuming ‘economic activity progresses in line with consensus forecasts’, according to the central bank’s quarterly survey of senior loan officers released today in Washington.
The survey, conducted last month through Jan 17, was available to Fed policy makers last week and may help explain the central bank’s fastest easing of monetary policy since 1990. Chairman Ben S Bernanke and his colleagues lowered their benchmark rate by 1.25 percentage points last month, aiming to revive lending and spending, averting a recession.
About 80 per cent of banks raised standards on commercial property loans, a record, while a majority tightened terms on prime home mortgages.
Mr Bernanke warned in a Jan 10 speech that there was ‘considerable evidence that banks have become more restrictive in their lending to firms and households’.
‘Financial markets remain under considerable stress, and credit has tightened further for some businesses and households,’ the Federal Open Market Committee said in its Jan 30 statement.
The survey covered 56 domestic banks and 23 foreign institutions. The 56 banks together have $5.95 trillion in assets, representing about 54 per cent of the country’s US$11.1 trillion total for all domestically chartered, federally insured commercial banks.
Investors anticipate the Fed will lower its benchmark rate by a further half-point by the March 18 meeting, according to futures contracts quoted on the Chicago Board of Trade. The central bank has lowered the federal funds rate to 3 per cent from 5.25 per cent since September.
About one-third of US banks said they increased their standards on commercial and industrial loans, while two-fifths said they widened spreads of interest rates over their cost of funds. Both responses represented an increase from the October.
In commercial real estate, the proportion of banks tightening terms was the highest since the Fed began seeking information on the subject in 1990. About 45 per cent, on net, of both US and foreign institutions said demand for such loans weakened in the past three months.
Many banks became stricter because of a ‘less favourable economic outlook’, and a ‘large fraction’ of US banks reported a ‘reduced tolerance for risk’, the Fed said. Examples of credit standards in commercial real estate include the maximum loan size and maturity and loan-to-value ratios, the Fed said. ‘The tightening there looks pretty significant,’ said Michael Feroli, an economist at JPMorgan Chase & Co in New York.
‘That sector is going to be challenged quite a bit this year.’
For home loans, about 55 per cent of US banks toughened terms for prime mortgages, up from 40 per cent in October, while 85 per cent of respondents made it tougher to get non-traditional loans, up from 60 per cent, the survey said. A majority of US respondents said demand worsened for prime, non-traditional and sub-prime mortgages.
Source: Bloomberg (Business Times 6 Feb 08)