WASHINGTON — Banks continued to make it easier for companies and some consumers to borrow in the third quarter amid tougher competition among lenders and an improved economic outlook, the Federal Reserve said Monday.
In a sign of continued weakness in the economy, however, the Fed's Senior Loan Officer Survey showed that demand for credit fell in July through September, especially for small firms. What's more, many banks said they don't expect still-tight lending conditions to come back to their long-run average for the "foreseeable future."
"The October survey indicated that, on net, banks eased standards and terms over the previous three months on some categories of loans to households and businesses," the U.S. central bank said.
The financial crisis led banks to tighten lending sharply from the end of 2008. Despite the recent easing of some standards, lending conditions remain much tighter than they were before the economy's downturn. "Tight credit" is contributing to holding consumer spending back, the Fed said last week after taking a new bold step to try and lift the economy by buying $600 billion in government debt in order to keep borrowing rates low.
The Fed survey, based on responses from 57 domestic banks and 22 U.S. branches and agencies of foreign banks, was sent to banks on or after Oct. 5 and responses were due by Oct. 19.
For the second time in a row, banks said they had eased terms on company loans. Most respondents cited a less uncertain economic outlook and increased competition from other banks or non-bank lenders for doing so.
The previous survey for the April to June period found that big U.S. banks had started to ease terms on loans to small businesses for the first time since late 2006.
Results on loans to households were more mixed. On the one hand, banks reported an increased willingness to make consumer installment loans while some lenders eased standards for approving credit cards. However, other banks cut the size of credit lines on existing credit card accounts and a minority even reported tighter standards on mortgage loans.
"On net, small fractions of domestic banks reported having tightened standards on both prime and nontraditional mortgage loans," the Fed said, noting this marks a reversal from the slight easing reported in the second quarter survey.
Despite the recent loosening in lending standards and record-low interest rates, continued weakness in demand for loans by companies and consumers have kept economic growth low.
Lower financing needs by companies for inventories, reduced investment in plant and equipment, and increases in internally generated funds were among the reasons cited for the lower demand for credit, especially from small firms.
Some banks reported decreased demand for all types of residential mortgages and consumer loans, though the weakness was primarily at smaller institutions, the Fed survey showed.
The weak demand for loans from companies and households has been a major issue for the recovery. The recovery has been painfully slow, with unemployment stuck close to 10% almost 18 months after the recession ended. Hit by the financial crisis and worried about the economic outlook, companies are hiring cautiously while consumers are borrowing and spending less.
A separate report Monday showed Americans continued to deleverage in July through September compared to the previous quarter, a downward trend that's been in place for almost two years.
Total consumer debt fell 0.9% in the third quarter, versus the previous three months, the New York Fed's quarterly report showed. Total consumer indebtedness was $11.6 trillion at the end of September, down 7.4% from its peak at the end of the third quarter of 2008.