Tuesday, November 9, 2010

Banks Ease Loan Standards, but Crunch Isn't Over

NOVEMBER 9, 2010


The credit crunch is easing in the U.S. but it's far from over.

Banks loosened their lending standards in the third quarter, but loans remained hard to get by recent historical standards, a trend expected to continue for the foreseeable future, according to the Federal Reserve's senior loan officer survey, released Monday.

The survey—based on responses from 57 domestic banks and 22 U.S. branches of foreign banks—showed banks for the second quarter in a row eased standards on business loans to firms of all sizes.

But the picture for households is more mixed. Banks have tightened standards on prime mortgage and home-equity loans but have become more willing to make consumer installment loans, such as car loans.

Some lenders are also easing standards for approving credit cards. However, other banks cut the size of credit lines on existing credit card accounts.

"We sort of had to figure out where the new normal was," said Robin Paterson, executive vice president and chief credit officer at American Business Bank in Los Angeles. "Once you know what that is, credit loosens up for certain types of [borrowers], but tightens up for others."

Most respondents cited the improving economy and increased competition from other lenders as reasons for relaxing loan standards to businesses. The previous survey, covering the second quarter, found that big U.S. banks had started to ease terms on loans to small businesses for the first time since late 2006.

Despite the recent move to ease lending as well as low interest rates, continued weakness in demand for loans by companies and consumers has kept a lid on economic growth. Lower financing needs by companies for inventories, reduced investment in plant and equipment, and increases in internally generated funds were among the reasons cited for the lower demand for credit, especially from small firms.

DeeDee Santos is among those no longer seeking loans. Ms. Santos, who runs a Turlock, Calif., metal-fabricating company with her husband, said her business has been turned down for working-capital loans and her company's collateral has shrunk, in part because the couple's home is worth less.

Ms. Santos said the company now funds new jobs with profits and customer deposits, which they planned to continue. Working without banks, even though it limits growth, "is something we've gotten used to," Ms. Santos said.

Weak demand for loans from companies and households has been a major issue in the recovery. A separate report Monday from the Federal Reserve Bank of New York showed that consumers have shaved nearly $1 trillion in outstanding debt over the past two years. Total consumer debt was $11.6 trillion at the end of September, down 0.9% from the prior quarter, and 7.4% from its peak in the third quarter of 2008, the bank said.

Household mortgage debt was down 7.4% from its peak in the third quarter of 2008. Much of this is related to home foreclosures, which generally wipe out mortgage debt. When mortgage and home equity-related debts were taken out of equation, indebtedness fell by 0.3% from the prior quarter and was 8.7% below the peak seen in the fourth quarter of 2008.

—Deborah Lynn Blumberg contributed to this article.

Write to Conor Dougherty at conor.dougherty@wsj.com and Luca Di Leo atluca.dileo@dowjones.com