FICO's quarterly survey of bank risk professionals indicate a credit gap that has hindered U.S. consumer spending is likely to continue well into 2011. Also, lenders are unlikely to meet the credit demands of small businesses in the near term.
The survey found 42% of respondents expect the amount of credit requested by consumers to increase over the next six months.  However, only 31% of respondents expect the amount of new credit offered by lenders to increase.  Furthermore, 39% of bankers surveyed expect approval criteria for consumer credit to become stricter, while only 13% expect approval criteria to loosen. The survey was conducted for FICO by the Professional Risk Managers’ International Association (PRMIA).

Results also indicate that credit will be tight for small businesses.  Over 59% of those surveyed expect the amount of credit requested by small businesses to increase over the next six months.  By contrast, less than 37% of respondents expect lenders to increase the amount of credit that is extended to small businesses.

“We continue to see a significant gap between expectations for credit demand and credit supply,” says Dr. Andrew Jennings, chief research officer at FICO and head of FICO Labs, which works with PRMIA on the quarterly survey.  “Until lenders put the problems in their mortgage portfolios behind them and see sustained growth in private-sector employment, the credit gap is unlikely to close.  In the near term, this could have a negative impact on spending during the holiday shopping season, which would be a big blow to an already-fragile economy.”

The survey found pessimism in other areas of the bank sector, most notably regarding bank stability. According to government figures, 141 U.S. banks failed from January 1 through November 5 of this year. That number exceeds the 140 failures that occurred in all of 2009, making 2010 one of the worst years in the country’s history for bank failures.

Unfortunately, the worst may not be over.  Nearly 54% of survey respondents expect the number of banks on the FDIC’s Problem Bank List to grow in 2011, while only 20% expect the number of problem banks to decrease.

"This is undoubtedly bad news for taxpayers and bankers alike,” says Jennings. "However, one ray of hope is that the amount of assets managed by failed banks in 2010 is over $50 billion less than the amount of assets managed by banks that failed in 2009. This indicates that larger local and community banks may finally be stabilizing.”

When asked about expected delinquency rates for credit cards, residential mortgages and car loans, survey respondents had a slightly less pessimistic outlook this quarter than last quarter. 

For example, while 38% of respondents expect delinquencies for credit cards to rise this quarter (compared to 19% who expect delinquencies to decline), 42% of respondents in the prior survey expected delinquencies to rise. Likewise, the percentage of respondents expecting an increase in mortgage delinquencies fell from 53% to 50%. The percentage of respondents expecting an increase in delinquencies on auto loans fell from 30% to 27%.

“The high level of expected delinquencies and continued unmet credit demand indicate that lenders are expecting a protracted economic recovery at best,” says Dr. Russell Walker of the Zell Center for Risk Research at Northwestern University’s Kellogg School of Management.  “Improvement in the mortgage markets will be needed to change this outlook.”

The survey included responses from 230 risk managers at banks throughout the U.S.  FICO and PRMIA extend a special thanks to The Zell Center for Risk Research for its assistance in analyzing the survey results.

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