Credit Tightens, Demand Falls
Banks are tightening lending standards for businesses and consumers -- even beyond real-estate loans -- and companies' demand for credit has weakened, a new Federal Reserve survey of senior bank-loan officers shows.</br></br>The January survey offers the hardest evidence yet that the credit crunch is spreading. Although banks also reported some tightening of lending requirements on credit cards and other consumer loans, commercial and industrial loans have been the most severely affected.</br></br>One-third of the U.S. banks and about two-thirds of the foreign banks responding told the Fed they had tightened lending standards on commercial and industrial loans during the three months ended Jan. 31. About half the banks said they have widened the spread between their cost of funds and what they are charging borrowers.</br></br>"Bankers are becoming more cautious," said Keith Leggett, economist at the American Bankers Association in Washington, "but also borrowers are getting more cautious."</br></br>About a third of the banks participating in the survey reported weaker demand for commercial and industrial loans, while about one in 10 reported strong demand. Among those that saw a reduced appetite for loans, "a decrease in customers' needs to finance inventories and investment in plant and equipment" was cited frequently. Additionally, 70% of the respondents cited a drop in businesses' needs for merger- and-acquisition financing as a reason for lower demand.