Posted on Wednesday, December 8, 2010
The credit analytics firm FICO has released the results of its fourth-quarter survey of bank risk professionals. Theconsensus is that lending will remain tight well into next year and a greater number of banks will be labeled as “problem” by the FDIC, but fewer bankers believe delinquency rates on residential mortgages will keep rising.
The survey, which was conducted for FICO by the Professional Risk Managers’ International Association (PRMIA), found that 42 percent of respondents expect the amount of credit requested by consumers to increase over the next six months. However, only 31 percent expect the amount of new credit offered by lenders to increase.
Furthermore, 39 percent of bankers surveyed expect approval criteria for consumer credit to become stricter, while only 13 percent expect approval criteria to loosen.
“We continue to see a significant gap between expectations for credit demand and credit supply,” said Dr. Andrew Jennings, chief research officer at Minneapolis-based 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.”
The survey also found pessimism in other areas of the bank sector, most notably regarding bank stability.
According to government figures, 149 U.S. banks failed from January 1 through November 22 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. As of the end of the third quarter, the FDIC’s so-called “Problem List” had 840 banks’ names on it. Nearly 54 percent of bank risk managers responding to FICO’s survey expect the number of banks on the regulators list to grow in 2011, while only 20 percent expect the number of problem banks to decrease.
“This is undoubtedly bad news for taxpayers and bankers alike,” Jennings said. “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 residential mortgages, bank risk managers had a slightly less pessimistic outlook this quarter than last quarter. The percentage of survey respondents expecting an increase in mortgage delinquencies fell from 53 percent to 50 percent.
Dr. Russell Walker is with the Zell Center for Risk Research at Northwestern University’s Kellogg School of Management, which provided assistance in analyzing the survey results and writing the final report.
He says the high level of expected delinquencies and continued unmet credit demand both indicate that lenders are anticipating a protracted economic recovery at best. According to Walker, this outlook won’t change until lenders see improvement in the mortgage markets.
By: Carrie Bay