Banks to Extend Curbs on Lending

WASHINGTON — Banks are bracing for more consumer loans to go bad and have extended a year-old trend of restricting their lending to individuals, a Federal Reserve survey said Friday.

The latest findings from loan officers at 59 domestic banks and 24 U.S. branches and agencies of foreign banks showed a sharp divergence in willingness to extend credit to businesses and individuals.

“The responses suggest that over the past three months domestic banks have become more [accommodating] lenders to businesses but have tightened credit to households,” the Fed said.

“Once again, both standards and terms for consumer loans were tightened, and banks reported less demand for these loans,” the survey said. It updates a survey conducted during January and issued early in February.

Standards for home mortgages were little changed from January, but demand for them weakened a little, the survey found.

The Fed noted that banks began toughening their rules for lending to consumers early in 1996 and were still doing so.

“Nearly one-half the banks said they had tightened standards for new credit card accounts over the preceding three months, and one-fifth reported having tightened standards on other consumer loans,” the survey said.

Forty percent of the banks said they reduced credit limits on credit card lines since January.

Furthermore, about one-third of the banks foresaw charge-off rates for consumer loans climbing, primarily because more people were willing to declare bankruptcy and stop paying.

A smaller proportion of banks--about one-quarter of those surveyed--anticipated having to charge off more business or commercial and industrial loans in coming months.

“Banks pointed to eased standards for these loans, a deterioration in business financial conditions and a deterioration in the economy generally as the reasons for their outlook,” the Fed said.

Nonetheless, banks appeared eager to keep lending to businesses.

The survey said stiff competition had caused many banks to offer easier terms for commercial/industrial and commercial real estate loans. It said there has been “a slight strengthening” in demand for both types of business credit.

The Fed noted some differences developing in lending patterns between domestic banks and the U.S. branches of foreign banks.

It said “small net fractions” of foreign-controlled banks had tightened some terms on commercial loans since January.

“This represents a shift for foreign banks, which reported having eased terms on these loans for the past several surveys,” the Fed said.

The banks that tightened their commercial lending rules said they did so because of “lower tolerance for risk and a deterioration in their current or expected capital position,” the survey said.