Credit Conditions Are Still a Constraint for a Recovery in Consumer Markets 

A recovery for consumer markets in these economies is in the making, in part due to improvement in the availability of credit for consumers over the last few quarters. The banking sector is experiencing an improved liquidity position that is contributing to an easing of credit standards. The news is not all positive, however: some banks are also reporting that the cost of their capital position and their ability to access market financing is contributing to a tightening of credit standards.

Because credit conditions for consumers are difficult to observe, the world's major central banks conduct regular surveys of lending officers at financial institutions. We will review the recent surveys that were conducted by the U.S. Federal Reserve, European Central Bank, Bank of England, and Bank of Japan. We focus on what they can tell us about consumer credit conditions and the outlook for consumer spending and markets.

U.S. Federal Reserve

The Federal Reserve conducts its Senior Loan Officer Opinion Survey on Bank Lending Practices each quarter. The survey is based on the response of 56 domestic banks and 23 U.S. branches and agencies of foreign banks. Its purpose is to provide qualitative and limited quantitative information on credit availability and demand as well as evolving developments and lending practices in U.S. loan markets. The survey has been conducted four times a year since 1992.

During the credit crunch, the net percentage of domestic banks that reported tightening standards for consumer loans increased sharply, and reached its highest level on record at the end of 2008. At that time the net percentage balance of domestic respondents peaked at about 60%. Since then, the net percentage balance has moved sharply downward. The May 2010 survey reported that the net percentage of domestic respondents showing tightening standards for consumer loans fell to just 2.8%. A small fraction of banks were still reporting tightened standards for credit cards and the majority of banks were keeping the standards basically unchanged compared with the previous three months. Domestic banks' lending stance towards other consumer loans eased.

Part of this improvement has to be attributed to the effectiveness of the Troubled Asset Relief Program that was introduced by the U.S. Treasury and the Federal Reserve's Term Asset-Backed Securities Loan Facility.

Source: United States Federal Reserve

European Central Bank

The European Central Bank conducts its Euro Area Bank Lending Survey quarterly. The survey has a sample size of 118 banks representing all the Eurozone countries. The survey considers three categories of loans including loans or credit lines to enterprises; loans to households for house purchase; and consumer credit and other lending to households. Questions are posed on credit standards for approving loans; credit terms and conditions; and credit demand and the factors that affect it. Generally, a positive net percentage indicates that a larger proportion of banks have tightened credit standards.

During the credit crunch, the net percentage balance on consumer credit and lending for house purchases peaked at about the same time as the Federal Reserve survey, and reached 40%. The net percentage balance has trended steadily downward since then, a pattern similar to the results from the Federal Reserve Survey. Importantly, the net percentage balance indicates that lending standards did not tighten as much as in the United States during the crunch. The subsequent move down has also not been as dramatic as in the United States.

According to the most recent survey, the net percentage of responses indicating tightening remained broadly unchanged for consumer credit and other lending to households at 11%. A number of banks reported that an improvement in their liquidity position contributed to an easing of credit standards. Others reported that the cost of their capital position and their ability to access market financing was contributing to a tightening of credit standards. Furthermore, it is likely that additional uncertainty will result from the turmoil in European government debt markets and may postpone the trend towards improving consumer credit conditions in the euro area.

Source: European Central Bank

Bank of England

The Bank of England's quarterly Credit Conditions Survey includes roughly 30 lenders that account for 75–85% of the U.K. market. The survey covers three major sectors: secured lending to households and small businesses; unsecured lending to households and small businesses; and lending to the corporate sector. Our focus is on the results related to secured and unsecured lending to households and small businesses. Similar to the other central bank surveys, the results are summarized using a net percentage of responses. In this survey, results are reported differently: lower values indicate tightening and higher values indicate loosening of credit standards.

The net percentage balance of survey responses indicated a sharp tightening in standards that started at the end of 2007 and peaked during the second half of 2008. Unlike the surveys by the Federal Reserve and the European Central Bank, the net percentage balance turned positive for secured lending during two quarters in 2009. Standards for unsecured credit remained tight through 2009: the net percentage balance averaged -14%. The first-quarter survey showed that the availability of unsecured consumer credit improved slightly, while it deteriorated slightly for secured credit compared with the previous survey.

Source: Bank of England

Bank of Japan

The Bank of Japan's Senior Loan Officer Opinion Survey on Bank Lending Practices at Large Japanese Banks is also conducted quarterly. The sample includes approximately 50 banks encompassing 74% of outstanding domestic loans of Japanese private banks. Questions are asked regarding demand for loans and current lending practices, and the responses cover groups of households, firms, and government. A net percentage balance is calculated and results are reported similarly to the Bank of England's survey, in that positive and negative values represent loosening and tightening, respectively.

The Bank of Japan survey was indicating very loose lending practices for loans to households earlier in the decade. The net percentage balance averaged 40% over the years from 2001 to 2004. Starting in 2005, the net percentage balance started to trend steadily downward—indicating that large Japanese banks became progressively less willing to lend to households over that period. The April 2010 survey showed that credit standards related to household loans started to rise again compared with the previous quarter and with last summer.

Source: Bank of Japan

Implications for Consumer Spending and Markets

Clearly, the availability of credit is not the only factor driving consumer spending. However, when conditions are exceptionally tight, they become an important constraint on consumers. In general, the availability of consumer credit has improved but has not returned to the conditions that exist during normal economic times in the world's major advanced economies.

Real consumer spending in the United States will begin to recover this year and is expected to increase by 2.4%, helped along by the availability of credit. In contrast, in the Eurozone and United Kingdom, real private consumption is only expected to stabilize in 2010 following last year's sizable contraction. Significant downside risk is persisting in these countries. Consumers in Japan also retrenched in 2009 and a rebound is expected this year. Consumer credit did not tighten in Japan in the same way as in the other industrialized countries.

Source: IHS Global Insight

by Robert Hoffman and Yinbin Li