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Foreign Lending Standards Speculated to Increase, Ill Boding for the U.S. Economy

by Chicago Agent

Strategists foresee foreign lending standards increasing, and hampering a U.S. economy in recovery.

Speculations of the Federal Reserve’s coming quarterly report entail fears that the European debt crisis may have a strong, adverse impact on foreign bank lending in the United States. The fourth quarter senior loan officer survey report, which is to be released this Monday, will detail whether foreign lending standards may begin to increase after months of loosening.

According to the Wall Street Journal, fears pertain to foreign banks increasing lending standards in the fourth quarter, which Barclays Capital Strategist Barry Knapp says, “would portend a flattening of the recovery.” Knapp noted in the WSJ article that European banks conducted their own fourth quarter survey and found significant tightening in lending standards that resulted from a lack of access to financial markets. “Because plenty of Europe’s banks do business in the U.S.,” Knapp says, “the Federal Reserve’s survey is likely to show some tightening among lending by foreign banks. And because domestic banks have plenty of European exposure, they may pull in their horns.”

Reportedly, people expect foreign lending standards will have been raised a net percentage when the report comes out – which bodes ill for economic growth. Ideally, the net percentage would be a larger negative number, because a reading of negative 100 percent would translate into meaning that 100 percent of banks have decreased lending standards, or at least held them steady. High negative readings imply future loan growth and ultimately, economic growth. High positive readings, on the other hand, imply stagnant recovery and economic growth.

Dan Greenhaus, strategist for BTIG believes that lending standards don’t have to tighten too much to make a difference. “Growth could weaken simply because banks aren’t loosening standards further,” he says.  As long as the demand for loans remains subpar, any pullback in loan supply resulting from increased standards will only stir up trouble.

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