Fed Says Bank Loan Standards Now Tighter

WASHINGTON (Reuters) – Banks in the United States tightened theirlending standards and terms for businesses and consumers alike amid adeteriorating economic outlook, a Federal Reserve survey showed onMonday.

The Fed’s January senior loan officer survey, which policy-makershad in rough form when they decided to lower benchmark interest ratesby a half-percentage point last week, showed also that demand for loansweakened among businesses and households over the last three months.

Banks that were tightening business credit terms "pointed to a lessfavorable or more uncertain economic outlook, a worsening ofindustry-specific problems, and a reduced tolerance for risk as reasonsfor their more-restrictive lending policies," the survey said.

The report is a further sign of the stiff headwinds facing theeconomy, where growth slowed to a near-stall rate of 0.6 percent in thefinal three months of 2007. The Fed cut a benchmark interest rate by acumulative 1.25 percentage points in the last two weeks of January to 3percent in an effort to prevent the economy from sliding into recession.

As the housing market collapsed earlier in 2007 and prompted a spikein mortgage delinquencies, the U.S. central bank has worried thattighter credit would choke off consumer and business spending,amplifying any deceleration of the broader economy.

The loan officers’s survey showed that one-third of domesticinstitutions tightened their lending standards for business loans inthe last three months, a larger fraction than in the previous poll inOctober.

A significant number of banks said they had tightened price terms onbusiness loans to all types of companies, including raising the cost ofcredit lines and premiums charged on riskier loans.

Meanwhile, significant numbers of banks tightened their lendingstandards on all types of mortgages. More than half of banks said theyhad tightened lending standards even on loans to borrowers with strongcredit.

About 60 percent of banks surveyed reported that demand for primemortgages had weakened. A similar fraction of institutions said theyhad tightened lending standards for home equity loans, the Fed said.

Banks are broadly anticipating a decline in credit quality this year, the Fed survey showed.

Between 70 percent and 80 percent of banks expect a deterioration inthe quality of all types of residential mortgage loans this year, theFed said. About 70 percent of domestic banks expect a weakening of thequality of credit cards and other consumer loans.

(Reporting by Mark Felsenthal; Editing by Jonathan Oatis)

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