For the first time in 27 years, banks have more government securities on their books than business loans.

Data released by the Federal Reserve Board on Friday showed that commercial and industrial loans outstanding slipped to $598.5 billion at the end of June, while holdings of U.S. government securities climbed to $607.3 billion.

While the two figures have been converging for months, their crossover provides dramatic evidence of how the recession and the aftermath of massive lending problems have changed the business of banking.

The Fed report provides grist for critics who assert that banks are abdicating their role as intermediaries between savers and business borrowers.

By loading up on Treasury bills and the like, banks are helping the government fund the national deficit. But they are doing little to fuel the engines of economic growth, critics charge.

Just last Wednesday, Fed chairman Alan Greenspan told a Congressional panel that bank lending efforts, particularly in New England, are "unacceptable."

Industry's Explanation

Banks, clearly stung by the attacks on their lending policies, name weak credit demand, rather than a reluctance to lend, as the main cause for the steady decline in business loans.

Economists say it's hard to tell which is more to blame.

"Obviously, demand is weak, but I do think there has been a drastic tightening of lending standards," said Norman Robertson, chief economist at Mellon Bank in Pittsburgh.

"There probably is a sizable number of small and medium-size companies who might want to expand, but are unable to, because they can't get financing from the banks," he added.

That, in turn, could be undermining employment, consumer confidence, personal income, and spending, thus hindering an economic recovery, said Mr. Robertson.

Still, the Mellon economist said he would be "horrified" if banks went back to the loose lending practices of the 1980s.

Banks are finally recovering from the credit woes of the last decade, and are only in a mood now to lend to higher-quality borrowers.

And there's the rub: it's the lower-quality borrowers that are attracted to the banking system. noted Alan Lerner, financial economist at Bankers Trust Co. Higher-quality borrowers can go elsewhere for financing.

"I think you have to give the banking system some kind of incentive to make lower-quality loans," he added.

Meanwhile, with banks awash in deposits, they have to put the money somewhere, said Raphael Soifer, banking analyst at Brown Brothers Harriman.

"While Treasuries yield less than a business loan, the fact that they don't chew off capital has given banks some incentive to invest in these instruments," said Irwin Kellner, chief economist at Chemical Banking Corp.

Last Time Was in 1965

The last time banks held more government securities than business loans was in January 1965.

At the end of May, the two categories had come within $3.7 billion of each other. Then in June, business loans decreased by $3.7 billion, from $602.2 billion, while securities holdings rose by $8.8 billion, from $598.5 billion.

Even if business loan demand does pick up, and banks are willing to meet it, bank holdings of government securities are still likely to exceed holdings of commercial and industrial loans for months to come, economists agreed.

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