Fed survey: new standards don't lure small firms

WASHINGTON – Banks loosened lending standards for small businesses over the past three months but demand for loans remained weak, the Federal Reserve said Monday.

It marks the second time in nearly four years that banks have made loans easier for small businesses to obtain, according to the Fed's new quarterly survey. The first breakthrough came in August, when the previous survey was issued. The Fed defines small businesses as those with annual sales of less than $50 million.

Banks pointed to a more "favorable or less uncertain economic outlook" and increased competition as reasons for loosening lending standards.

Even so, demand for commercial and industrial loans declined over the last three months, especially for small firms, the Fed said.

That's because companies — both small and large — aren't seeing booming sales. Although the recession ended more than a year ago, consumers aren't spending lavishly like they normally do after deep downturns. Instead, they are paring debt, watching their spending and building their savings.

In fact, a separate report from the Federal Reserve Bank of New York, released Monday, found that households cut their debt by 0.9 percent last quarter as they closed credit card accounts and borrowed less against their homes.

Consumer debt totaled $11.6 trillion in the July-to-September quarter. That's a drop of 0.9 percent from the prior quarter and 7.4 percent from its peak in the third quarter of 2008.

Households have slashed nearly $1 trillion from outstanding debts since that peak, the New York Fed said.

Economists say it's difficult to separate exactly how much of the drop in total household debt is because of home foreclosures or defaults on credit cards and other loans. "Consumer debt is declining but only part of the reduction is attributable to defaults and charge-offs," said Donghoon Lee, a senior economist at the New York Fed.

"Americans are borrowing less and paying off more debt than in the recent past. This change, which we continue to study carefully, can be a result of both tightening credit standards and voluntary changes in saving behavior," Lee added.

In the Fed's lending survey, banks reported an increased willingness to make consumer loans. Some banks said they eased standards for approving credit card applications. However, a few banks said they reduced the size of credit lines on existing credit cards and tightened terms for new applications.

During the height of the financial crisis in the fall of 2008, banks tightened sharply their lending standards on business and consumer loans. Despite the recent loosening of standards on some loans, it is still much harder to get a loan now than before the crisis. Banks told the Fed they didn't think lending standards would return to more normal — and less restrictive conditions — until after 2012.