Banks Tighten Standards on All Types of Loans

Washington, DC, Nov. 4, 2008--Banks held back on all sorts of lending, from home mortgages to credit cards and business loans, as the worst financial crisis in seven decades took a bigger toll on the economy.

The Federal Reserve said Monday that its latest quarterly survey of bank lending practices found high numbers of banks reporting tighter credit standards across a broad range of loan products. Nearly 60 percent of banks responding to the survey said they had tightened lending standards on credit card debt.

The latest Fed survey was conducted in the first two weeks of October, too soon to reflect possible effects of the government's program to inject about $250 billion into U.S. banks by directly buying shares in them as part of a broader financial rescue effort. The government also plans to buy billions in distressed mortgage-related assets that banks hold.

The Fed survey of 55 domestic banks and 21 U.S. offices of foreign banks found that sizable percentages of banks had "continued to tighten their lending standards and terms on all major loan categories over the previous three months."

The Fed found 85 percent of the domestic banks responding to the survey reported that they had tightened their lending standards for a major type of business loans known as "commercial and industrial" loans, up from 60 percent in the June survey.

Nearly all banks -- 95 percent -- reported tighter standards for the lines of credit they extend to large and medium-sized businesses.

A large number of banks also reported they were tightening standards for both credit cards and other types of consumer loans.

Besides the nearly 60 percent of banks tightening standards on credit card debt, 65 percent said they had tightened lending standards for other types of consumer loans over the past three months.

About 20 percent of the domestic banks reported cutting limits for existing credit card accounts held by prime, or strong credit, customers. Around 60 percent of domestic banks had reduced those limits for "nonprime" borrowers.

Amid the souring economy and rising job losses, defaults on credit card debt have mounted and banks already staggering from the mortgage and credit crises are losing billions more from unpaid credit card bills.

Credit card lenders have been reducing customers' credit lines, raising interest rates or even closing accounts as they tighten the reins to reduce their risk.

Continuing a pattern seen since the housing bubble burst, large majorities of banks reported tighter lending standards on prime mortgage loans, as well as nontraditional mortgage loans and subprime mortgages extended to borrowers with weak credit histories.

The Fed survey found 70 percent of the banks responding said they had tightened lending standards further for prime mortgages. That was on top of 75 percent who were tightening such standards in the previous survey.