Lenders on Tightening Trend, but Rising Risk Still Pervades

Credit underwriting standards for commercial and retail loans tightened at most banks for a second straight year, according to the 15th annual Survey of Credit Underwriting Practices. The report, released Tuesday by the Office of the Comptroller of the Currency, said 86% of banks tightened standards for commercial loans compared with 52% in the prior-year survey; for retail loans, 83% tightened compared with 68% a year earlier.

The survey covers the 12-month period ending March 31, 2009, and includes $3.6 trillion of loans—84% of all outstanding loans in the national banking system.

Despite continued tightening, the survey shows risk in retail and commercial portfolios increased for the second straight year, a trend survey respondents expected to continue in the coming year. In commercial real estate, risk increased at 96% of the banks since the previous survey; 98% expected further increases in the coming year. In retail categories, 90% of banks reported increasing risk in home equity and credit card lending; 94% and 95% of banks, respectively, projected increasing risks in those categories in the coming year.

The four years of eased underwriting that preceded the current period of tightening continue to heighten risk worries. Increased risk is also primarily caused by concerns about the economy, job losses and declining real estate values.