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Financial System Showing Signs of Life

May 5, 2009

So, I got my hands on the Federal Reserve Board’s April 2009 Senior Loan Officer Opinion Survey on Banking Practices. If you read my editorial in the December 2008 issue of F&I magazine, you’ll remember that I covered the October survey. And boy, was that a doozy. The April survey, however, offered some light at the end of the tunnel.

Is lending back? Unfortunately, not like it was in the good times. But the mood is certainly lightening among those surveyed, which included 53 domestic banks and 23 U.S. branches and agencies of foreign banks. And although the number of respondents reporting tightened lending policies for the first three months of 2009 remains high, it decreased slightly for the second consecutive survey.

Best of all, the one category that saw a drop in the number of respondents reporting tighter lending policies was consumer loans. Credit card loans actually remained unchanged from the January survey, while guidelines for residential mortgages continued to tighten.

Demands for all types of loans, however, remains low, respondents reported. The only exception was demand for prime mortgages, a category that registered an increase in demand for the first time since the survey began to track prime mortgages separately in April 2007.

The only bummer was the outlook for loan quality. A significant majority of banks reported that credit quality for all types of loans is likely to deteriorate over the year if the economy meets current forecasts.

Looking at commercial and industry lending, about 40 percent of domestic respondents — compared to approximately 65 percent in the January survey — reported tighter guidelines on such loans. Although it doesn’t mean the floodgates for these types of loans are open again, the April survey marked the first time since January 2008 that the percentage fell below 50 percent.

Guidelines for consumer loans and credit card loans also continued to tighten, but not anymore than they did in January. In fact, nearly 60 percent of respondents indicated that they have tightened lending standards on credit card loans, about the same percentage as in the January survey. About 50 percent of respondents — down from 60 percent in the January survey — reported tightening standards on other consumer loans.

Now for the bad news: About 45 percent of respondents reported having raised the minimum scores on consumer loans, and about 65 percent of banks, compared with 45 percent in the January survey, indicated they had lowered credit limits to either new or existing credit card customers.

However, only about 5 percent of domestic banks indicated that they had become less willing to make consumer installment loans over the previous three months, which is down from 15 percent in the January survey and 45 percent late last year.

As for outlook, more than 70 percent of respondents said the quality of their bank’s portfolio is likely to deteriorate this year, with more than 90 percent of domestic respondents reporting that loan quality is likely to deteriorate for all loan categories.

But you know what? Further deterioration of credit quality shouldn’t surprise anyone. The jobless rate continues to increase and consumer confidence can’t seem to settle on being up or down. Despite all that, it’s clear lenders are getting their groove back. And if you throw in news about the London Interbank Offered Rate — a daily average of rates that 16 different banks charge each other to lend money in London — dropping below 1 percent for the first time since 1986, it’s quite possible that the problems with our financial system have reached the bottom. Let’s just hope. 

To check out the full report from the Federal Reserve, click here: http://www.federalreserve.gov/boarddocs/SnLoanSurvey/200905/fullreport.pdf.

 

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