LONDON, England (CNN) -- Banks and other lenders in Britain plan further cuts in lending to households and businesses over the next three months, the Bank of England said Thursday.
Lenders also expect lower demand for mortgages and business loans in the next quarter, tighter terms and conditions on loans, and an increase in defaults on loans, the Bank of England said.
The dim outlook came in a Bank of England survey of lenders at the end of the third quarter. It was conducted over a three-week period ending September 17, after the failure of three firms in the United States but before further failures and growing uncertainty caused chaos in global financial markets.
The survey found banks and other lenders had already started reducing the availability of credit to households and businesses in the three months to mid-September, and that they expected further reductions in the next three months.
Lenders said 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 of England said.
Demand for lending for house purchases and remortgaging declined "sharply" and more than expected over the three months to mid-September, the lenders reported, and they expected that demand to fall even further.
David Buik, an analyst at BGC Partners in London, said the fact that the survey was taken before the crisis took hold means credit conditions will probably tighten even more.
"It is dire," Buik told CNN, "and it's going to get worse."
Lenders said demand for credit by private businesses had also declined over the previous period and they expected that fall to continue. They said reduced demand for lending for capital investment, mergers and acquisitions, and from the commercial real estate sector contributed to the declines.
Indicating an increased unwillingness on the part of banks and other lenders to part with their cash, the survey found a widening in spreads on lending to households and businesses in the previous quarter. That means lenders planned to still lend to some customers but also planned to charge them higher rates for those loans.
Default rates were also up over the three months to mid-September, the lenders reported, with further increases expected among both households and businesses.
Demand for credit card and other unsecured borrowing by households declined over the past three months, lenders said, but they expected that demand to be broadly unchanged in the coming three months.
By September 17, the U.S. government had agreed to bail out insurance giant AIG; Lehman Brothers had declared bankruptcy; and Bank of America had taken over Merrill Lynch. Read a timeline of the crisis
Since then, the credit crisis has swallowed other firms, and central banks around the world -- including the U.S. Federal Reserve and the European Central Bank -- have injected billions into money markets.
Late Wednesday, the U.S. Senate approved a $700 billion financial rescue plan primarily aimed at buying troubled assets from banks. Watch analyst explain why recession is likely »