Banks are continuing to relax credit standards, and demand for loans is still on the rise, despite the Federal Reserve's yearlong campaign to constrain borrowing.
The central bank found in its latest national survey of credit conditions, released last week, that demand for business loans continues to grow. It also discovered that banks are still loosening credit terms, although at a slower rate.
Economists say the ongoing easing of loan qualifications probably irks the Fed, which spent the past year raising rates to brake the economy while cautioning banks against easy lending.
"You can draw the very strong conclusion that banks aren't pulling in their horns at this point," said Gary L. Ciminero, chief economist at Fleet Financial Group, Providence, R.I.
Even if only a few more banks loosen standards, "it would still be more than the Fed is comfortable with," he said.
"The Fed must be frustrated to see demand bounding ahead, defying their wish to curtail borrowing," the Fleet economist said.
"There is lots of overcapacity in the banking industry, and it is overcapitalized right now," he said, 'so you are getting banks, at least in some places, really out there trying to buy loan business."
There were some tentative signs of a slowing economy in the survey. In addition to the slowing rate of increase in the number of banks relaxing credit terms, the Fed noted a slackening of growth in consumer and mortgage loans.
If the trend to credit easing is actually beginning to slow, it may be partly because of the central bank's "raising the yellow flag," said Gary L. Schlossberg, senior economist at Wells Fargo & Co., San Francisco.
Last fall in New York, speaking at the American Bankers Association convention, Fed Chairman Alan Greenspan bluntly warned that some banks were not pricing their loans correctly.
"The easing of standards reflects competition among banks, particularly since credit quality is good right now and bank balance sheets are fully restored," said Mr. Schlossberg.
He also said some added corporate loan demand is typical at this stage of the business cycle "as financing needs begin to outstrip internal sources of funds."
The Fed last month polled senior loan officers at 59 domestic commercial banks and 24 U.S. branches of foreign banks for its survey. The last study was done in November.