Fed Official: Declines in Bank Lending 'Stark'

Elizabeth DukeTotal bank loans dipped 11 percent in the third quarter 2009 compared to the previous year; and unused credit lines at commercial banks have plummeted 25 percent – or about $1 trillion – since their peak in late 2007, a Federal Reserve official said today.
The grim picture of consumer and small business lending was drawn by Federal Reserve Board Member Elizabeth A. Duke in prepared remarks for the Economic Forecast Forum in Raleigh, North Carolina.
“Risk spreads on some types of loans at banks have continued to rise, and the decline in bank loans outstanding has been stark,” Duke said. “For example, our data show that total loans on banks’ books fell at an annual rate of more than 11 percent during the third quarter of 2009, with all major loan categories contributing to the decline.”
In addition, she added, unused credit lines at commercial banks have dropped almost 25 percent from their peak at the end of 2007; or down $1 trillion below their peak.
A number of factors “are at work” as factors contributing to the reduction in bank loans, she said.
“For most commercial banks, the quality of existing loan portfolios continues to deteriorate as levels of delinquent and nonperforming loans are still rising,” Duke said. “In response, banks have reduced existing lines of credit sharply and tightened their standards and terms for new credit.”
She stressed how banks have been forced to end “lending relationships” as individual banks have “sought to reduce loan portfolios or concentrations within those portfolios or as banks failed or merged.”
The result is a lag time during which small businesses and other banks have had to re-establish new relationships, a process that has grown difficult “amid continued uncertainty about the economic outlook and possible future loan losses,” she said.
However, Duke also spoke of a diminishing demand for credit. The National Federation of Independent Business reported that small businesses are “highly leveraged” and may be trying to pay down debt and rebuilt balance sheets. Others may have difficulty in quality for new credit because of “weakened balance sheets, reduced income, falling real estate collateral values, and in some cases, a recent history of payment problems.”
“My conversations with bankers in recent weeks, however, lead me to be somewhat optimistic that we may begin to see an increase in bank loans later this year,” Duke said. “Nearly all the bankers with whom I have talked report that their business plans for 2010 are based on achieving increases in loan volumes.”

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