WASHINGTON -- Business demand for loans from commercial banks softened in the past several months, according to a survey of senior loan officers released yesterday by the Federal Reserve Board.
The survey of 60 commercial banks taken in October said, "Domestic banks reported that business loan demand from firms of all sizes had weakened" since the Fed's last survey in August. The drop in loan requests was reported by both large and small banks.
The report also said bank credit conditions generally remained unchanged. Only three of the banks surveyed said they had tightened their lending rules, while the remaining 57 said they had not altered their loan policies.
None of the banks surveyed said they had eased credit conditions.
Federal Reserve Board Chairman Alan Greenspan two weeks ago cited the credit crunch as a major impediment to economic recovery. Since then, the Fed has lowered short-term interest rates twice and cut the discount rate to 4.5%.
However, the latest senior loan officer survey suggested that lower rates will not by themselves bring about an increase in business activity. "The balance is certainly tilted toward weaker loan demand," said one Fed official.
Moreover, the Fed report says many banks had set more stringent terms on loans for business loans since August, meaning that once firms got loans they had to pay more for them. Loan terms include interest rates, fees, and other requirements, such as collateral.
Little change was noted in the demand for residential mortgages over the past three months, the Fed survey said, and banks' readiness to provide consumer credit "appeared to increase some."
But the report said consumer demand for loans seemed to soften along with business demand. Demand for home equity lines of credit was weaker, "and there were clear indications that the demand for consumer installment loans fell."
About half of the banks surveyed said they had increased their holdings of collateralized mortgage obligations compared with other interest-bearing assets. Typically, banks reported that they had substituted CMOs for other mortgage-backed securities and for U.S. Treasury and agency securities.
Separately, members of Congress yesterday renewed their drive for legislation to reform the Federal Reserve by making Fed officials more accountable to the public.