Federal Reserve Reports Banks not tightening as much

The Federal Reserve is out with their quarterly bank survey results. This summary is based on responses from 55 domestic banks and 23 U.S. branches and agencies of foreign banks.

The January survey indicated that commercial banks generally ceased tightening standards on many loan types in the fourth quarter of last year but have yet to unwind the considerable tightening that has occurred over the past two years. The net percentages of banks reporting tighter loan terms continued to trend lower. Banks reported that loan demand from both businesses and households weakened further, on net, over the survey period.

Demand from both businesses and households for all major categories of loans weakened further, on net, over the past three months. The net fractions of banks that reported weaker demand for business loans continued to decline, while changes in the comparable readings on demand for loans to households were mixed.

Banks continued to tighten standards on residential real estate loans over the past three months.

In addition, banks reported that they had tightened terms on CRE loans substantially over the past year.

In response to a special question (repeated on an annual basis since 2001), large net fractions of both domestic and foreign institutions again reported having tightened a range of terms on CRE loans over the course of 2009. The largest net tightening was reported on the spreads of loan rates over banks' cost of funds, debt-service coverage ratios, and loan-to-value ratios.

Question on consumer lending: For the first time in nearly three years, a small net fraction of banks reported an increased willingness to make consumer installment loans now as opposed to three months ago. However, demand for consumer loans of all types reportedly had weakened further since the previous survey.

About 12% of the banks said they were somewhat more willing to make consumer loans than they had been during the prior 3 month period while 2% responded that they were much less willing. Demand for consumer loans dropped at approximately 41% of the banks and increased at 8%.

Bottom line: Demand continues to weaken and albeit most respondents are not tightening further (after 9 consecutive quarters of the big squeeze), they are also not loosening.