Consumer Markets Hampered by Tight Credit Conditions

Credit market conditions are difficult to observe so the world's major central banks conduct surveys of lending officers at financial institutions in their respective countries. This article reviews the surveys that are conducted by the U.S. Federal Reserve, European Central Bank, Bank of England, and the Bank of Japan, in light of what they can tell us about consumer credit conditions and the outlook for consumer spending.

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 53 domestic banks and 23 U.S. branches and agencies of foreign banks. The net percentage of domestic banks that report tightening standards for consumer loans has trended steadily higher since the beginning of 2007: they reached their highest levels on record at the end of 2008. These survey results are broadly consistent with the contraction in consumer non-mortgage installment credit that has occurred so far this year.

In the August survey, almost 35% of domestic banks indicated they had tightened lending standards on credit card loans—a considerable fall from the 60% reported in the April survey. Thirty-five percent of respondents reported tightening standards on other consumer loans. This was down from the nearly 45% in the April survey. The Troubled Asset Relief Program (TARP) that was introduced by the U.S. Treasury in late 2008 was aimed at cleaning up the balance sheet of commercial banks and, in the process, unfreezing credit markets. The Federal Reserve also introduced the Term Asset-Backed Securities Loan Facility (TALF) to help facilitate renewed issuance of asset-backed securities at reasonable interest rate spreads. It is likely that the survey results are showing an improvement because of this program.

Source: United States Federal Reserve

European Central Bank

The Euro Area Bank Lending Survey is conducted quarterly by the European Central Bank. It has a sample size of 118 banks from all the euro area countries. Three categories of loans are considered, 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. The survey results show the difference between the share of banks reporting that credit standards have been tightened and the share of banks reporting that they have been eased. Generally, a positive net percentage indicates that a larger proportion of banks have tightened credit standards.

According to the survey, the tightening in credit standards has been increasing at an unprecedented rate over the last two years. In fact, in the fourth quarter of 2008, the net percentage of respondents reporting that credit standards are tighter than in the previous period hit a record high of 42%. By the second-quarter survey of 2009, lending standards had moderated somewhat—only 21% of banks surveyed here tightened lending standards on consumer credit and other lending to households.

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 including: 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. Lower values indicate tightening and higher values indicate loosening of credit standards.

Credit conditions tightened abruptly starting at the end of 2007. Standards for consumer credit were raised through the middle of 2008. By the second quarter of 2009, the survey readings were showing eased conditions especially for secured credit. The availability of household unsecured credit is quite different as the balance of lenders reduced accessibility for the ninth consecutive quarter. A 9.7% net balance of lenders reported an increase in availability of secured credit, the first since September 2007. A 13.4% net balance of lenders reported tightening of unsecured credit availability, a trend dating back to June 2007.

Source: Bank of England

Bank of Japan

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

The net percentage covering consumer credit has been on a steady decline and reached its lowest point in October 2008. The July 2009 survey results show credit standards for approving household loans have eased, albeit moderately, compared to the previous three-month period. The aggregate credit standards net percentage has been steady at 9.0 since January 2009, indicative of a leveling off from the tighter mandatory credit standards experienced in late 2008. Nevertheless, by historical standards, household credit standards remain very tight.

Source: Bank of Japan

Implications for Consumer Spending and Markets

Although credit conditions are not the only factor driving consumer spending, the survey results broadly support the IHS Global Insight forecast for these countries. Real consumer spending in the United States will fall 0.8% this year, which represents the largest contraction in more than 20 years. Nevertheless, it is a moderate decline partly due to the impact of the government's fiscal stimulus package that, among other things, boosted unemployment benefits and cut federal withholding taxes. It is also moderate compared to the expected retrenchment in other countries. In the Eurozone countries, real private consumption is expected to fall 1.1% this year. This is more indicative of the results of the Euro Area Bank Lending Survey. The outlook for consumers in the United Kingdom is particularly dire, as we expect a 3.1% contraction this year. Credit conditions for U.K. consumers have clearly improved over the last three quarters, pointing to an improved outlook for 2010. Consumers in Japan are also facing very tough conditions. Our expectation is that real private consumption will decline by 1.6% this year, which is again reflective of the tough conditions for consumer credit.

Sources: IHS Global Insight