Fed Says Tightened Lending Standards Going Down

A quarterly report from the Federal Reserve shows that banks tightening their lending standards have become fewer compared to figures from the previous quarter. This may be a sign that the credit card crunch may be easing up for consumers.

According to the latest survey of the Federal Reserve, banks that are tightening their lending standards for consumers as well as businesses are now at 15% of the total number of banks surveyed. This is approximately a 50% drop from the figures taken from the previous quarter.

Before the economic crisis and the resulting unprecedented rise in defaults and write offs, banks had maintained very lax standards over credit borrowing. Credit was widely available to borrowers, even sub-prime one’s resulting in banks overextending themselves. When the economic crisis hit, banks saw borrowers walk away from their debts instead of paying them off which almost many banks to the brink of bankruptcy.

Banks are now wary of borrowers and have tightened their grip on credit. Borrowing standards have become stricter which means that borrowers, both consumers and businesses, are having a hard getting access to credit. While these tightened standards may be safer for banks, this reduced risk tolerance is also a hindrance to the overall recovery of the economy.

According to the Federal Reserve’s survey, those banks that tightened their lending standards during the last quarter did so because they wanted to reduce their risk due to the unfavorable economy and worsening problems in the industry. The survey also showed that demand for certain types of loans have also continued to be low.

TD Securities economist Ian Pollick wrote to their clients saying, “The modicum of improvement in various categories seems to be going hand in hand with the pace of economic recovery”.

When the Federal Reserve asked banks about lending to smaller firms whose annual sales went only as high as $50 million, only 16% of the banks said that they had tightened their standards. Last July, during the survey of the previous quarter, more than one third of the respondents said that they had tightened lending standards to smaller firms.

For consumer credit card lending and other types of consumer loans, the tightening of lending standards have also eased up. Only 15% of banks asked about their standards said they have tightened them. Last July, 35% of those said they had done so. The majority of those asked said they had left their standards unchanged since the last quarter.