Credit still tight at nation's banks

Federal Reserve survey reveals that fewer banks tightened their lending standards in latest quarter; loan demand remains weak.

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By David Ellis, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) -- Credit continued to remain tight at the nation's banks during the final three months of 2008, according to a report published Monday by the Federal Reserve. But a smaller percentage of institutions toughened their lending standards.

In its latest survey of loan officers, the Fed revealed that the percentage of banks that tightened their lending policies on both consumer and commercial loans fell during the fourth quarter as compared to the previous quarter.

About 65% of the 53 domestic banks surveyed said that they tightened lending standards on commercial and industrial loans, down from 85% when the Fed last delivered its reading on bank lending in October.

A smaller percentage of banks also indicated they had tightened their standards on residential and commercial real estate lending.

But the percentage of banks tightening their standards on credit card and other consumer loans was unchanged from October, as the U.S. economy deteriorated further.

Banks' willingness to lend money has become a focal point in the ongoing crisis after the U.S. government provided nearly $200 billion in government funds to financial firms in an effort to get credit flowing again.

Both lawmakers and taxpayers have expressed concerns that instead of lending, many banks are hoarding the cash, using capital to fund acquisitions or paying lavish bonuses.

Some industry executives have maintained that they are still making new loans and extending existing credit lines to both consumers and businesses.

But those rebuttals have provided banks little relief from Congressional scrutiny as lawmakers prepare to release the second half of the $700 billion financial rescue package.

Hoping to deflect some of that criticism, Bank of America (BAC, Fortune 500), which has received $45 billion in government aid, said last week it planned to publish reports that would track its lending activity in multiple areas.

However, the appetite for loans remained relatively weak among both consumers and businesses in the fourth quarter.

About 45% of the banks surveyed reported weak consumer loan demand, virtually unchanged from where it stood in October, while demand for non-traditional mortgages, as well as home equity lines of credit remained under pressure.

Still, the latest numbers from the Fed revealed that interest in new prime residential mortgages popped back up a bit in the latest quarter.

Monday's survey, which is widely viewed as a reliable assessment of bank lending activity across the country, failed to offer any clear cut view on how willing banks were to extend credit to both individuals and households, however.

Banks broadly trimmed the size of existing credit lines for consumers and businesses. Yet at the same time, fewer banks tightened their requirements for credit scores and loan down payments.  To top of page

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