WASHINGTON Banks in the United States tightened their lending standards and terms for businesses and consumers alike amid a deteriorating economic outlook, a Federal Reserve survey showed on Monday.
The Fed's January senior loan officer survey, which policy-makers had in rough form when they decided to lower benchmark interest rates by a half-percentage point last week, showed also that demand for loans weakened among businesses and households over the last three months.
Banks that were tightening business credit terms "pointed to a less favorable or more uncertain economic outlook, a worsening of industry-specific problems, and a reduced tolerance for risk as reasons for their more-restrictive lending policies," the survey said.
The report is a further sign of the stiff headwinds facing the economy, where growth slowed to a near-stall rate of 0.6 percent in the final three months of 2007. The Fed cut a benchmark interest rate by a cumulative 1.25 percentage points in the last two weeks of January to 3 percent in an effort to prevent the economy from sliding into recession.
As the housing market collapsed earlier in 2007 and prompted a spike in mortgage delinquencies, the U.S. central bank has worried that tighter 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 domestic institutions tightened their lending standards for business loans in the last three months, a larger fraction than in the previous poll in October.
A significant number of banks said they had tightened price terms on business loans to all types of companies, including raising the cost of credit lines and premiums charged on riskier loans.
Meanwhile, significant numbers of banks tightened their lending standards on all types of mortgages. More than half of banks said they had tightened lending standards even on loans to borrowers with strong credit.
About 60 percent of banks surveyed reported that demand for prime mortgages had weakened. A similar fraction of institutions said they had 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 in the quality of all types of residential mortgage loans this year, the Fed said. About 70 percent of domestic banks expect a weakening of the quality of credit cards and other consumer loans.
(Reporting by Mark Felsenthal; Editing by Jonathan Oatis)