Credit squeeze getting worse

Aug 13, 2008
Credit squeeze getting worse

THE credit crunch has worsened in the past three months, the US
Federal Reserve reported, and most banks in the United States say
they will keep cutting back on credit to consumers and businesses.

Despite all the aggressive moves by the Fed in the past year to ease
the flow of credit to the economy, a record percentage of US banks
were making it more difficult for borrowers in the three months ended
July, the Fed said in its quarterly survey of senior loan officers at
52 major banks.

A majority of banks tightened their lending standards and terms on
all types of loans to businesses and consumers, the survey shows.
This means banks are reluctant to lend for home mortgages, credit
cards, home equity loans, commercial real estate loans, or commercial
and industrial loans.

The tighter credit will have knock-on effects on the US economy as
American consumers find they have to limit their spending on credit.

Banks told the Fed they were restricting credit because of worries
about the economy, illiquid markets and their own fragile balance
sheets.

No bank in the survey eased credit terms for any type of loan in the
past three months.

'The impending tightening may ultimately curb consumer credit
noticeably,' Mr Harm Bandholz, an economist for UniCredit Markets,
was quoted as saying. 'This, in turn, would be another nail in the
coffin of the US consumer, who is already suffering from the weak
labour market, high inflation and falling house prices.'

The lack of credit could also sink the commercial real estate market,
and curb capital investments by businesses.

Despite the tighter credit standards, however, other data from the
Fed shows that consumers increased their borrowing on credit cards
and car loans through the end of the second quarter, perhaps because
other sources of borrowing, such as home-equity loans and car leases,
are less available.