U.S. Banks Tightened Loan Terms

A majority of U.S. banks made it tougher for consumers and businesses to get credit in the past three months even as lenders received infusions of taxpayer funds. About 65 percent of domestic banks reported having tightened lending standards on commercial and industrial loans to large and middle-market firms. Large fractions of domestic banks continued to report a tightening of policies on both credit-card and other consumer loans.

It may underscore concern among Obama administration officials and some U.S. lawmakers that banks that have received more than $200 billion of taxpayer funds are failing to lend that on to customers.

The U.S. economy continues to be hampered by a financial system that lost more than $1 trillion on housing credits since the mortgage crisis began in 2007.

Treasury Secretary Timothy Geithner is supposed to soon announce a new strategy for reviving our financial system that gets credit flowing to businesses and families. Obama’s goals are to lower mortgage costs and extend loans to small businesses so they can create jobs.

A less favorable or more uncertain economic outlook was cited by all domestic banks as the cause for tighter standards on commercial loans, as well as lower risk tolerance and problems in specific industries.

By contrast, concern about strains on their capital levels were less of a reason for the tightening in lending standards in the period. Only about 25 percent of domestic respondents said a deterioration in their bank’s current or expected capital position had contributed to the change, in comparison with approximately 40 percent in the October survey.

This result maybe is due to distribution of more than $194 billion through Fed program of purchasing stakes in U.S. banks. It has also mounted rescues of Citigroup Inc. and Bank of America Corp., insuring a total of more than $400 billion of illiquid assets on their balance sheets.

Now, Obama’s team is discussing ways to overhaul the bailout fund, called the Troubled Asset Relief Program, in an effort to ensure banks step up lending. Possible strategies include insuring other banks’ hard-to-value investments, and setting up a so-called bad bank that would remove toxic assets from their balance sheets.

But the question is, who borrows? The decline in demand partly reflects the fact that nearly all banks continued to tighten their lending standards and boost the cost of the loans they did extend, making loans unavailable or less economical for many borrowers.

However, it also shows that the recessionary rot has moved deeper into the economy. Even if efforts to spur consumption are successful, businesses may not need to boost capacity or finance large inventories for some time. Other types of borrowers are in similar straits.

“Liquidity trap” is here, and it will keep Obama finger-crossed for a long time.