Stumbling economy raises loan standards

Associated Press

WASHINGTON — Faced with a slumping economy, banks continued to tighten lending standards over the past three months for businesses and consumers, the Federal Reserve reported Monday.

Of 55 large U.S.-owned banks surveyed in January, 45.4 percent reported tightened standards for loans to large and midsize companies, those with annual sales of $50 million or more. That was a slight improvement, compared with 51 percent of banks reporting higher loan standards in October’s survey.

Lending standards also had been tightened for smaller businesses. The survey found that 41.8 percent of the banks reported tighter lending standards for small businesses, with sales below $50 million annually, compared with 40.4 percent in the previous survey.

For consumers, 18.2 percent of domestic banks reported they had increased standards for approving credit card applications, a small improvement over the 20 percent reported doing so in the October survey.

Approximately 17 percent of banks reported they had tightened their standards for approving consumer loans other than credit cards, also down slightly from the 20 percent that reported stricter standards in the previous survey.

Standards for residential mortgage loans were largely unchanged over the last three months.

It is customary for banks to tighten loans standards when an ailing economy increases the prospect of loan defaults.

The U.S. economy, which fell into recession in March, grew at a 0.2 percent annual rate in the final three months of last year, raising hopes among economists that the recession may be ending.

Based on answers to a series of special questions not asked in the last survey, the Fed said extra cash that households have received from a recent wave of mortgage refinancing has gone to pay off debt, make home improvements and to buy goods.

For banks that reported worse loan quality than they would have predicted, "nearly all claimed that a rise in bankruptcy filings triggered by proposed bankruptcy reform legislation was an important reason," the Fed said.