A Federal Reserve survey of loan officers found what many companies have already been saying: banks are less willing to lend and they are tightening credit standards.

The Fed's October 2008 senior loan officer opinion survey on bank lending practices found that institutions continued to tighten their lending standards and terms on all major loan categories over the previous three months.

The net percentages of respondents that reported tightening standards increased relative to the July survey for both commercial and industrial as well as commercial real estate loans. Respondents of foreign institutions also tightened credit standards and terms on loans to businesses over the past three months.

Large fractions of domestic banks reported tightening standards on loans to households over the same period. Demand for loans from both businesses and households at domestic institutions continued to weaken, on net, over the past three months.

The Fed's survey of loan officers found significant net fractions of large domestic banks and US branches and agencies of foreign banks reported increases in C&I loans drawn under preexisting commitments. Moderate fractions of all banks, on net, reported increases in C&I loans not drawn under preexisting commitments.

Domestic banks reported reducing credit limits on existing credit card accounts both to prime and to nonprime borrowers, citing a less favorable or more uncertain economic outlook, reduced tolerance for risk, and declines in customer credit scores as important reasons for the decreases.

About 85% of domestic banks—up substantially from 60% in the July survey—reported having tightened lending standards on C&I loans to large and middle-market firms over the past three months.

At the same time, 75% of domestic banks said they had tightened their lending standards on C&I loans to small firms, an increase from a July survey. On net, about 95% of US banks reported having tightened the costs of credit lines to large and medium-sized firms, while nearly 90% reported such tightening for smaller firms.

Nearly all banks—up from roughly 80% in the July survey—had increased spreads of loan rates over their cost of funds on C&I loans to large and middle-market firms, while about 95% of respondents, more than in the July survey, reported having widened spreads on loans to small firms.

Substantial fractions of respondents also reported increasing premiums charged on riskier loans to firms of all sizes.

Originally published in IDDMagazine.com.