Fed Says Banks Toughen Lending Standards Amid Economic Slump

August 11, 2008 by · Leave a Comment
Filed under: Industry News 

Banks in the United States further tightened lending standards in all major categories, especially for consumer loans, in the past three months amid a weakening economic outlook, according to a Federal Reserve survey released on Monday.

The July survey of senior loan officers at 52 domestic banks and 21 branches and agencies of foreign banks also showed that demand for loans by both businesses and households had weakened since the last survey in April.

The survey added to evidence that a year-long credit crunch sparked initially by subprime mortgage defaults is far from easing as banks hoard capital and make it harder to borrow.

The tightness in credit is now being driven by broader weakness in the U.S. economy and is defying efforts by the Fed to boost liquidity in the banking system and keep interest rates low.

“It clearly is going to be difficult to get a loan. The Fed cutting rates doesn’t help a lot when you can’t get a lender to make a loan,” said Gary Thayer, senior economist at Wachovia Securities in St. Louis.

He said the tighter lending standards was typical in a weakening economy, and creates headwinds that will help delay recovery, along with a worsening housing slump and still-high fuel prices.

The tightening of credit was particularly pronounced in the consumer sector, where banks increased minimum credit scores required on credit cards and reduced card balance limits.

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