NEW YORK (MktNews) - On a relative basis from the mid-1990s, U.S. banks appear to have tightened lending standards by an amount similar to the widening of U.S. corporate bond yield spreads in the last few years, Moody's Investors Service said in a statement Friday.
"An increase in the number of banks raising spreads on loans has tracked closely the expansion of bond yield spreads. According to the Fed's senior loan officer survey, the net percentage of domestic banks increasing spreads on loan rates over their cost of funds was 57.1% in January."
Because yield spreads remain close to 15-year peaks, this suggests the latest increase in lending standards has been severe, the statement said.
While not distinguishing between a bank that has raised credit premiums by a large amount and one that enacted a modest increase, this statistic serves as a useful approximation of the extent to which lending standards are being tightened, Moody's said.
Between 1990-1992, an average of 25% more banks reported raising than reducing credit spreads, which accompanied a 103 basis point average long-term industrial bond yield spread. Bond yield spreads thinned to 87 basis points when the net percentage of banks raising spreads on loans dropped to -38.7% in the subsequent five year period (more banks were cutting than raising risk premiums).
Since the beginning of 1998, the net percentage of banks increasing spreads jumped back to +20.4%. Similarly, corporate bond yield spreads have also widened to an average of 149 basis points over the last three years.
Measuring loan spreads directly is more difficult but the Fed provides an approximation. The average spread over 90-day Libor for a sample of bank loans surveyed by the Fed was 150 basis points in early November 2000, which was up from 134 basis points in November 1999 but below a recent peak of 168 basis points in early August. Spreads have widened from a year ago despite a decline in the average maturity of sampled loans.
Overall, loan portfolios are getting riskier. The percentage of loans described as having moderate risk rose from 33.3% to 42% in the year ended November while the percentage described as having "minimal or low" risk dropped from 40.1% to 32.4%.