Lending Falls at Fastest Rate Since 1942

Banks tightened credit last year at what the Wall Street Journal calls an “epic pace,” recording their biggest full-year decline in loans outstanding in 67 years. The figure comes from a new FDIC report that paints the picture of a banking industry that, apart from a few top-tier players, is in dire straights. The number of banks at risk of failing jumped to 702, a 16-year high.

That’s in part because 5% of all loans were at least three months past due—a record high. The banks are “bumping along the bottom of the credit cycle,” says FDIC chair Sheila Bair, predicting that 2010 will likely see even more banks fail than the 140 that collapsed last year. Many fear a coming crush of failing commercial real-estate loans, which take longer to turn sour than residential mortgages. (More credit market stories.)