Tuesday, February 5, 2008

Credit Market Tightening

From the WSJ:

Banks are tightening lending standards for businesses and consumers -- even beyond real-estate loans -- and companies' demand for credit has weakened, a new Federal Reserve survey of senior bank-loan officers shows.

The January survey offers the hardest evidence yet that the credit crunch is spreading. Although banks also reported some tightening of lending requirements on credit cards and other consumer loans, commercial and industrial loans have been the most severely affected.

One-third of the U.S. banks and about two-thirds of the foreign banks responding told the Fed they had tightened lending standards on commercial and industrial loans during the three months ended Jan. 31. About half the banks said they have widened the spread between their cost of funds and what they are charging borrowers.

"Bankers are becoming more cautious," said Keith Leggett, economist at the American Bankers Association in Washington, "but also borrowers are getting more cautious."

About a third of the banks participating in the survey reported weaker demand for commercial and industrial loans, while about one in 10 reported strong demand. Among those that saw a reduced appetite for loans, "a decrease in customers' needs to finance inventories and investment in plant and equipment" was cited frequently. Additionally, 70% of the respondents cited a drop in businesses' needs for merger-and-acquisition financing as a reason for lower demand.


Remember that banks stand in the middle of the US economy; they take funds from consumers and lend them to borrowers. Or, they provide financing via the financial markets. But either way, the smooth working of the financial sector is imperative to a growing economy. But right now lenders are getting stingier and borrowers are decreasing (Here is a link to the entire Fed report).

Let's look at some of the charts and graphs from the reports to see exactly what is happening. On a technical note -- instead of using Photoshop, these graphs are simply stuck into the blog so you have to click them to get a bigger image.



Above is a chart of how many financial institutions are tightening their standards for consumer loans. While credit card loan standards started to tighten in mid-2007, other forms of consumer loans started to tighten at the beginning of 2007. In other words, it appears that banks probably had an idea their standards were too loose a while ago. However, also notice the number of lenders who are tightening non-credit card loans are higher than in the last recession.



Above is a chart of the number of respondents who are willing to make consumer installment loans. Note the number has decreased to a level below that of the last recession. It is also near the lowest level of the last 15 years -- not a good sign.



Above is a chart of the number of institutions who are tightening standards for commercial loans. Notice this number has spiked very high and is currently at its highest level of the last 15 years. It is currently higher than in the last recession as well.



Above is a chart for the number of respondents who tightened standards for residential mortgages. Notice this number is the highest it has been for the last 13 years.

The bottom line from these charts is really clear: lenders are tightening their standards for a variety of loans. For an economy like the US that is heavily dependent on credit, this is a very ominous development.

I also have to wonder how long it will be before the financial players start to lower standards again. Considering we're still in the middle a a ton of financial writedowns I think it's going to be awhile. And that means the pain could last far longer than we would like.