The reluctance of U.S. banks to lend to people with poor credit histories is restraining the country's economic recovery by holding back consumer borrowing and spending, research from the San Francisco Federal Reserve (Fed) Bank released Monday showed. The study, which appeared in the regional Fed bank's Economic Letter, showed that tighter credit, not just consumers' reluctance to increase debt, is impeding household spending. San Francisco Fed senior economist John Krainer said in the study that banks are particularly unwilling to lend to borrowers who have defaulted on mortgages or have low credit scores. Krainer wrote that if banks are unwilling to make loans, policies that “attack bank financial problems directly or help consumers qualify for stricter underwriting terms may be appropriate, along with the traditional monetary policy prescription of lowering interest rates."
