WASHINGTON - If you're a financial institution, it has become a little easier to borrow money. But for most of the rest of us, it's tougher than ever.
It was the freeze-up of the wholesale lending markets used by banks to fund day-to-day operations that caused the financial system to break down in September. That crisis has eased significantly, thanks to government intervention to guarantee loans and prop up financial institutions.
But the credit crunch hasn't gone away. It has just moved to Main Street, where businesses and consumers are hard-pressed to get loans. And the scarcity of credit is intensifying the economy's downward spiral.
"Lending standards on most forms of credit are now tighter than at any time in recent memory," Ryan Sweet, an economist with Moody's Economy.com, wrote in a recent report. "The reduction in credit availability threatens to lengthen and deepen the recession."
In an October survey of bank lending practices, the Federal Reserve noted a broad move to restrict credit.
About 85 percent of domestic banks told the Fed they had imposed stricter lending standards on large and mid-size commercial borrowers, while 75 percent said they had done so for small businesses. At the same time, 60 percent indicated they had tightened criteria for credit cards, and 65 percent clamped down on other consumer loans.
"This matches my observation of institutions in the West," said Steven Buster, chief executive officer of Mechanics Bank in Richmond. "It's very clear to me there has been a tightening of credit standards."
With banks on the receiving end of hundreds of billions of dollars in aid from Washington, the credit cutback could become a significant political issue. Institutions will find themselves under pressure from political leaders to open the spigots.
Last week, Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, fired a shot across the banking industry's bow, warning that it faced the wrath of Congress if it used bailout money to pay dividends and bonuses or buy out other institutions.
"Increased lending activity is the only legitimate purpose for taxpayer funding of these institutions," Frank declared. "It is very important if congressional and public support for this program is to continue that we receive assurances ... that the money being advanced will be used only for relending and for no other purpose."
Bankers argue that it's legitimate to use public money to buy securities such as corporate debt, because those markets also were shut by the credit lockdown. And they say allowing strong banks to buy weak ones also serves the public good because it means taxpayer money wouldn't be needed to pay off depositors at failing institutions. They point to JPMorgan Chase's takeover of insolvent Washington Mutual in September, carried out without use of Federal Deposit Insurance Corp. funds.
The Treasury Department plans to buy ownership stakes in an array of strong banks, providing additional capital to fund loans. The problem, bankers say, is that in a recession there aren't a lot of good lending opportunities. For example, no lender would finance expansion of a shopping center when retail sales are falling fast.
Mechanics Bank, one of the larger community banks in Northern California, is an exception in that it hasn't tightened loan qualifications. It has long been a conservative lender with strict standards on commercial loans, according to Buster.
"Our underwriting hasn't changed at all in the last two years," he said. "It's just that fewer projects meet our underwriting criteria."
The bank used to assume it would take roughly 18 months from construction for a developer to sell the units in a condominium. The borrower had to demonstrate they had the resources to carry the project during that absorption period. Now, the bank assumes it would take substantially longer to fill up the condo, which would make it a lot harder for the developer to qualify for a loan, Buster said.
Things are similar for consumers, where a combination of stiffer standards and worsening household finances are undermining borrowing power for credit cards and home and auto loans.
With credit cards, lenders have become much more aggressive about segmenting the market, cherry-picking consumers with the best credit records and squeezing everybody else.
"Credit card issuers are playing defense and are being much more selective about which cardholders qualify for the best rates," said Greg McBride, senior analyst with Bankrate.com, a personal finance Web site. "They're also being more proactive in reducing exposure by cutting down credit lines."
It's a similar story for home loans. "Good credit, proof of income and money for a down payment - if you have those three ingredients, credit is widely available," McBride said.
But, he noted, the best rates are reserved for customers with credit scores above 740, a tiny elite among borrowers.