Lenders tightening prime credit
The quarterly survey made it clear that a credit crunch, which started last summer with rising defaults in higher-risk subprime mortgages, has spread to better-off consumers. Nearly 55 percent of U.S. lenders responding to the survey had tightened standards for prime mortgages in the quarter. That's up from 40 percent in the previous U.S. Fed survey.
About 60 percent of U.S. banks instituted tougher criteria for revolving home-equity credit lines. And 80 percent of domestic lenders set higher standards for commercial real estate development loans, the highest level since the Fed started asking that question in 1990.
"Banks are increasingly unwilling to lend, even to creditworthy borrowers," Moody's Economy.com said in an advisory to clients. "A major risk to the outlook is that lenders overtighten credit standards."
The Fed survey covered a swath of U.S. and foreign banks for the three-month period ending Jan. 17. It was completed before the Fed cut a key interest rate by an aggressive 1.25 percentage points in two moves on Jan. 22 and Jan. 30 - noting that credit had tightened for some firms and consumers.
The Fed has cut the federal funds rate - what banks charge each other for overnight loans - from 5.25 percent in September to 3 percent now. Many lenders use that rate as a benchmark in pricing business and consumer loans.
Some analysts say financing is available, if pricey.
"Good companies ... are still capable of borrowing. Their costs may have gone up slightly," says Roland Chalons-Browne, CEO of Siemens Financial Services, which provides financing to businesses. "If you are a manufacturing company that is making something sensible with a halfway decent business plan, I still think there is money available."
David Rosenberg, North American economist at Merrill Lynch, notes that despite the Fed rate cuts, credit markets remain constricted. The difference between interest rates on U.S. Treasury bonds, for example, and some other interest-bearing products have widened, a sign of a deteriorating credit environment.
In broader credit markets, for example, rates on high-yield, high-risk junk bonds are now 7 percentage points higher than comparable Treasury bonds, up from about 3 percentage points a year ago.
About 75 percent-85 percent of domestic and foreign banks expect some deterioration in loan quality.
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