Commercial Bank Lending Update

In January, the Federal Reserve released its latest survey on the current state of the U.S. banking system. The survey – titled Senior Loan Officer Opinion Survey on Bank Lending Practices – contains a review of bank lending practices for the previous three months. The survey is based on input from 53 domestic banks and 23 U.S. branches and agencies of foreign banks.

By reviewing this document, it is possible to review how effective the injection of billions of dollars has been with regards to convincing the commercial banks to free up credit. To read the complete survey results, go to the federal reserve website and search for “Senior Loan Officer Opinion Survey”.

Commercial Real Estate Lending

According to the survey, about 80 percent of the domestic banks questioned reveal that during the survey period, they have tightened their lending standards for commercial real estate (CRE) – this is down slightly from the 85 percent that claimed to have tightened requirements for the three-month survey released in October of 2008. At the same time, commercial lenders report that demand for CRE loans weakened by about 55 percent.

In addition, the survey also found that 95 percent of domestic banks surveyed increased loan-rate spreads compared to foreign banks reporting a 75 percent increase in loan-rate spreads.

Residential and Household Lending

One of the key areas for household lending remains the need for mortgages and 45 percent of the institutions reported a tightening of lending standards compared to nearly 70 percent for the previous period. This is a notable decrease but also noteworthy is the 10 percent overall drop in demand for residential mortgages. In addition, only four banks continued to offer subprime mortgages during the survey period.

The availability of home equity lines of credit (HELOCs) appears to have increased slightly with over 60 percent of domestic lenders reporting they have tightened lending standards. This is down from the 75 percent reported in the previous survey but still indicates an overall lack of credit available for consumer lines of credit within the banking system for many consumers.

Finally, nearly half of the banks surveyed have raised the minimum credit scores required to obtain consumer loans and credit cards. This is in conjunction with reduced credit limits as 45 percent of the institutions claim they have lowered the credit limits on both existing credit card holders as well as new credit card accounts.

So, what conclusions can we draw from this? Overall, the survey shows that there has been – at best – a slight increase in the availability of credit for some types of corporate and consumer loans. Given that the commercial banks have received several hundreds of billions of taxpayer dollars already and will soon receive even more, many are questioning if the banks are doing enough to ease the credit crunch. President Obama and Secretary of the Treasury Timothy Geithner have made it clear that they expect the banks to make more money available for lending and the possibility of nationalizing the banking system – at least in the short-term – may yet be one option the Obama administration employs to meet this goal.

In fairness, this survey contains information for the final quarter of 2008 only but the next survey expected for the end of April will coincide with the release of another $US 2 trillion by the Treasury Department. You can bet that Obama and Geithner will be paying close attention to the results of this survey – a fact that will not be lost on the banks.

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