Despite strong urging from the government to lend, banks continued their dramatic tightening of underwriting standards for businesses and consumers over the past three months. Small banks were far more likely to make mortgage loans to prime borrowers and less likely to lower existing credit card limits than were large banks. These findings are contained in the Fed’s Senior Loan Officers Survey, which covers the three-month period ending in October.

As a result of reduced tolerance for risk and the uncertain economic outlook, the portion of domestic banks that reported tightening lending standards for commercial and industrial (C & I) loans to large and mid-sized firms jumped to 85 percent from 60 percent in July. At the same time, 95 percent said they had tightened the cost of credit lines to these businesses and “nearly all” increased spreads of loan rates over their cost of funds.

The report noted a significant increase in the portion of banks that reported tightening non-price-related lending terms on C & I loans to firms of all sizes. About 40 percent of domestic bank loan officers reported an increase in the dollar amount of C & I loans drawn under existing commitments. However, responses differed base on bank size. Just five percent of small banks reported such an increase compared to 65 percent of the big banks surveyed.

Large majorities of respondents reported they had tightened their lending standards for both commercial and residential real estate lending but there was some relaxation in terms for prime residential mortgage borrowers, especially among small banks. Seventy percent of domestic banks said they had tightened prime mortgage standards, down from 75 percent in July. Again, the difference between large and small banks was striking. Just 55 percent of small banks tightened standards for prime mortgage borrowers compared to 80 percent of the large banks.

In response to questions about consumer lending, large banks were far more likely than small ones to have tightened lending standards on credit card and other types of consumer loans.

Big banks were three times more likely to lower limits on existing credit card accounts. Thirty percent of large banks reported reducing these limits while only 10 percent of small banks said they had taken such action.

Of the banks that lowered limits, nearly all — 95 percent — cited the uncertain economic outlook and reduced tolerance for risk as the reasons. “Large majorities” also cited a decline in customer credit scores and an increase in missed payments on credit card and other types of loans at their bank.