November 9, 2009 / 10:16 PM / 10 years ago

Fewer banks tightening lending standards: Fed

WASHINGTON (Reuters) - The percentage of banks tightening lending standards declined in the third quarter, while loan demand fell less sharply as the economy began to grow, the Federal Reserve said on Monday.

While showing credit was still tight and loan demand soft, the Fed’s October survey of bank loan officers signaled a further easing in the number of banks tightening credit, which hit a peak last year as the financial crisis deepened.

“We’re coming off the spikes in terms of credit tightness,” said Brian Bethune, an economist for IHS Global Insight in Lexington, Massachusetts. “We’re back to just normally tight, not pathologically tight,” he said.

Easier credit could help the economy recover from its deepest recession since the 1930s, although consumers and businesses still appear wary of taking on debt.

The U.S. economy expanded at an annualized rate of 3.5 percent over the July-September period, likely ending the recession. Unemployment, however, reached a 26-1/2 year high of 10.2 percent in October, and analysts expect the economy’s recovery to be sluggish.

The Fed’s survey of banks operating in the United States found the percentage that were tightening standards and terms for most loan categories dipped from levels reached last year.

There was little change in the number of banks tightening standards on prime residential mortgages and home equity lines of credit. About 25 percent of banks reported tightening standards on good quality real estate loans, well off the 75 percent of institutions who reported doing so in July 2008.

The number of banks tightening standards for credit cards fell to 15 percent from the 35 percent that reported doing so in the July survey, the lowest percentage since April 2008.

About 15 percent of banks tightened standards on commercial and industrial loans, down from around 80 percent in the October 2008 survey.

Demand for most types of loans weakened on balance, the Fed said. However, demand was stronger for prime residential real estate loans. Demand for home loans from borrowers with strong credit has gained for three quarters in a row.

Weakening of demand was somewhat less widespread for commercial and industrial loans, commercial real estate loans and “nontraditional” mortgages, a reference to adjustable rate loans or loans to borrowers with blemished credit, the Fed said.

Softening of demand was about the same for consumer loans, and more pronounced for home equity lines of credit.

In a token of some pickup in business lending, JPMorgan Chase & Co (JPM.N) said on Monday it plans to increase small business lending by $4 billion in 2010.

However, reflecting consumer retrenchment, Advanta Corp ADVNA.O, a large issuer of credit cards to small businesses, filed for bankruptcy, stung by soaring defaults.

Reporting by Mark Felsenthal; Editing by Chizu Nomiyama

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