Seemingly out of nowhere, U.S. banks were being accused late last week of having started a credit crunch that helped push world financial markets over the brink.
The facts did not support it. "I am not concerned," said Federal Reserve Board Governor Edward W. Kelley Jr.
Most major banks had just lowered their prime lending rates, presumably to invite new loan applications. Indeed, demand for credit began falling in early August and fresh signs emerged last week that a slowdown in the economy has curbed borrowers' appetites.
"I don't see the slightest sign of a credit crunch, and I don't see any reason why we should have one," Mr. Kelley said.
"There is tons of capital and tons of liquidity out there," said Lee B. Murphy, chief credit officer at First Liberty Bank, Macon, Ga., and chairman of Robert Morris Associates, the trade group for loan officers. "Banks might dot their i's and cross their t's more than they have been doing, but they are going to still make loans."
Concerns about a more severe closing of the credit spigot grew Thursday when a Fed survey showed that nearly a quarter of responding banks tightened credit standards for large and middle-market borrowers last month. Only one of the 35 big banks told the Fed it had eased underwriting standards.
Industry officials said the efforts to tighten were not surprising given the fall in stock prices, Russia's debt default, and Asia's economic woes. "The industry is reacting in the way it is supposed to react to what looks like a slowdown in the economy," said Joel L. Naroff, chief bank economist at First Union Corp.
In fact, regulators lauded banks for finally heeding credit-risk warnings.
"We are seeing signs that banks are taking the kind of action that we have wanted them to take," said Julie L. Williams, acting Comptroller of the Currency. "They are tightening up where it is prudent for them to be tightening up."
Ms. Williams said further tightening may still be necessary. "The message we are sending remains the same," she said. "Bankers need to look carefully at the lending standards they are employing."
Allen W. Sanborn, president and chief executive officer of Robert Morris Associates, said he doubts there will be a credit crunch because banks are still reporting record earnings.
"Credit crunches usually only occur after banks take big losses," he said. "I think there is a good chance we will avoid a credit crunch and those big losses."
The Fed, which normally conducts its senior loan officer survey quarterly, decided to do an additional poll in September to gauge the impact of recent financial market turmoil. The 35 domestic banks polled collectively have $1.89 trillion of assets.
Less favorable economic conditions and worsening industry-specific problems were the two most common reasons given by banks for tighter commercial and industrial underwriting standards. (In small-business lending, about 6% of banks tightened standards, double the percentage that loosened. The rest left standards unchanged.)
The data also show an acceleration of the across-the-board drop in loan demand that first appeared in the August survey. For big commercial credits, 19.2% of the lenders reported a fall in demand, compared to 7.7% who reported an increase in demand. The rest reported no change.
The schism was even greater for loans to companies with less than $50 million in annual sales: 21.2% reported lower demand compared with 3.8% reporting higher demand.
Banks reporting lower consumer loan demand also outnumbered those reporting higher loan demand: 20.4% compared with 6.1%.
In the August survey, demand for large commercial credits was down, but lending to small businesses and consumers was relatively flat.