Fed says banks broadly tighten U.S. loan standards

WASHINGTON (Reuters) - Banks in the United States further tightened lending standards in all major categories, especially for consumer loans, in the past three months amid a weakening economic outlook, according to a Federal Reserve survey released on Monday.

The July survey of senior loan officers at 52 domestic banks and 21 branches and agencies of foreign banks also showed that demand for loans by both businesses and households had weakened since the last survey in April.

The survey added to evidence that a year-long credit crunch sparked initially by subprime mortgage defaults is far from easing as banks hoard capital and make it harder to borrow.

The tightness in credit is now being driven by broader weakness in the U.S. economy and is defying efforts by the Fed to boost liquidity in the banking system and keep interest rates low.

"It clearly is going to be difficult to get a loan. The Fed cutting rates doesn't help a lot when you can't get a lender to make a loan," said Gary Thayer, senior economist at Wachovia Securities in St. Louis.

He said the tighter lending standards was typical in a weakening economy, and creates headwinds that will help delay recovery, along with a worsening housing slump and still-high fuel prices.

The tightening of credit was particularly pronounced in the consumer sector, where banks increased minimum credit scores required on credit cards and reduced card balance limits.

The survey found 65 percent of U.S. domestic banks tightened standards on credit cards and other consumer loans, considerably higher than the 30 percent that tightened card standards in the previous survey.

On commercial and industrial loans, 60 percent of domestic banks reported tightening credit standards and 80 percent of banks noted they had increased the spreads of loan rates over their cost of funds on loans to large- and middle-market firms.

"Very large majorities of domestic and foreign respondents pointed to a less favorable or a more uncertain economic outlook, their bank's reduced tolerance for risk, and the worsening of industry-specific problems as reasons for tightening lending standards and terms," the Fed said in its survey report.

The housing sector got no relief in the past three months, as lenders further tightened standards all mortgage categories. The Fed said about 75 percent of U.S. banks tightened lending standards on prime mortgages -- those given to customers with better credit histories -- versus about 60 percent who said they tightened in the April.

In a special question on larger so-called jumbo mortgages, the Fed said about 30 percent of domestic banks said they had securitized or sold loans that meet new, higher conforming loan amounts to mortgage finance giants Fannie Mae and Freddie Mac.

However, 50 percent of the respondents said there was a lack of demand for such loans and 40 percent said there was a limited number of mortgage applicants at their bank who meet the Fannie Mae and Freddie Mac underwriting criteria for conforming jumbo loans, which require better credit scores and higher down payments.

The Fed survey also revealed that both domestic and foreign banks expected to continue tightening standards on most loans through the end of 2008 and into 2009.

"We think the Fed might have to be tightening by the end of this year, so higher interest rates coupled with higher credit standards is not a pretty picture," said Kim Rupert, managing director of Action Economics LLC in San Francisco.

(Reporting by David Lawder; Editing by Neil Stempleman)