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Monday, August 17, 2009

Fed: Lending Standards Tighten, Loan Demand Weakens

by Calculated Risk on 8/17/2009 02:00:00 PM

From the Fed: The July 2009 Senior Loan Officer Opinion Survey on Bank Lending Practices

The July 2009 Senior Loan Officer Opinion Survey on Bank Lending Practices addressed changes in the supply of, and demand for, loans to businesses and households over the past three months. The survey also included two sets of special questions: The first set asked banks to rank the causes of declines this year in commercial and industrial (C&I) lending, and the second set asked banks about their expectations for lending standards going forward relative to the average level over the past decade. The results reported here are based on responses from 55 domestic banks and 23 U.S. branches and agencies of foreign banks.

In the July survey, domestic banks indicated that they continued to tighten standards and terms over the past three months on all major types of loans to businesses and households, although the net percentages of banks that tightened declined compared with the April survey. Demand for loans continued to weaken across all major categories except for prime residential mortgages. The fractions of domestic banks reporting additional weakening in demand in this survey were slightly lower than those in the April survey for C&I loans and home equity lines of credit, approximately the same for commercial real estate (CRE) and nontraditional residential mortgages, and slightly higher for consumer loans.

In response to a special question, domestic banks pointed to decreased loan demand and deteriorating credit quality as the most important reasons for declines in C&I lending this year. In response to a second special question, most banks reported that they expected their lending standards across all loan categories would remain tighter than their average levels over the past decade until at least the second half of 2010; for below-investment-grade firms and nonprime households, the expected timing is later, with many banks reporting that standards for such borrowers will remain tighter than average for the foreseeable future.
emphasis added
CRE Loan Demand vs. Non-residential Investment Structures Click on graph for larger image in new window.

Of particular interest is the increase in tighter lending standards for Commercial Real Estate (CRE) loans. This graph compares investment in non-residential structure with the Fed's loan survey results for lending standards (inverted) and CRE loan demand.

Note that any reading below zero for loan demand means less demand than the previous quarter. The slump in CRE investment is just getting started ...

More charts here for residential mortgage, consumer loans and C&I.