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Banks sharply tightened their credit card underwriting standards beginning in May, and many banks expect additional tightening through the first half of next year, according to a Federal Reserve Board survey released yesterday. In its quarterly survey of senior loan officers conducted in July at 50 major banks, the Fed found that 66% of banks said they had tightened their lending standards on credit card loans over the previous three months, more than double the 32% who said they did so in April's survey. About 60% of respondents said they expect their banks to tighten standards on credit card loans in the second half of 2008, and about 35% thought that their banks would tighten such standards in the first half of 2009. About 30% of respondents reported weaker demand for consumer loans of all types over the previous three months, up from about 20% who said so in the April survey. Some analysts warn that tightening lending criteria too much in response to the economic downturn could hurt card issuers' long-term profits. "Mortgage-lending standards were way too lax in recent years, but many lenders are now at risk for overcorrecting and tightening underwriting standards too much for all products," Brad Neigel, a senior analyst at Aite Group, tells CardLine. "Credit card issuers should take a very granular approach and base their underwriting standards on specific products and borrower risks, as opposed to tightening standards across the board." Restricting credit too sharply this year could prolong the economic downturn. Neigel says. "Tightening up credit underwriting too much could put consumers in more difficult positions than they are right now, delaying a broad recovery until 2010 or 2011," he says.
