Banks plan to turn the screw still tighter on both companies and private individuals in the coming months, demanding more security for their loans and setting ever more demanding credit-scoring standards.
The Bank of England’s quarterly credit conditions – completed in mid-September before the collapse of Lehman Brothers triggered the latest bout of financial turmoil – showed that both mortgage lending and credit lines extended to companies both declined more than expected during the late summer.
There were more defaults buy both corporate and personal borrowers, although lenders told the Bank that in the case of non-financial companies the increase was from very low level.
Demand for mortgages fell back, as well as the supply. Banks were surprised to find applications for re-mortgages falling off as well as those for house purchase.
While lending less to home-buyers with deposits of less than 25 per cent, some banks were starting to compete with each other by cutting rates for those seeking mortgages for less than 75 per cent of the valuation – though it is not certain that this trend has continued in recent weeks.
They were also tightening up their credit-scoring criteria for credit cards and other unsecured loans, and turning down more applications.
“Lenders reported that the changing economic outlook, their expectations for the housing market and changes in their appetite for risk had contributed to the decline in credit availability,” the Bank said.
“These factors, together with tighter wholesale funding conditions, were expected to contribute to the tightening of credit over the next three months.”
Hetal Mehta, senior economic adviser to the Ernst & Young ITEM Club, commented: “With banks still unwilling to lend to each other, the amount of credit available for lending to other companies and individuals is falling.
“But while mortgage credit supply has been a problem for some time, equally worrying is the drop in its demand. And with expectations that demand for mortgage credit will fall even further in the fourth quarter, we are seeing a vicious circle of diminishing consumer confidence and falling house prices.
“With the on-going financial turmoil, the situation is likely to worsen in the coming months. Banks expect defaults on all lending to increase.”
George Buckley, a Deutsche Bank economist, said: “This is precisely what we would have expected. It reinforces the fact that the housing market still has a lot further to weaken.
“The more evidence you get that credit conditions are tightening, the more you have to think that an earlier rate cut is required despite inflation concerns.”
