WASHINGTON - Bankers do not plan to cut loan rates once deposit insurance premiums drop and the industry's expenses are shaved by $4.5 billion a year, a Federal Reserve survey shows.

The central bank said that, according to its survey of senior loan officers, the benefits of lower premiums will flow mainly to the bottom line.

"The responses suggest banks will take the largest share of the reduction as increased profits, followed by increased rates paid on deposits, with the smallest share going toward lower loan rates," the Fed said.

Still, nearly half of the loan officers at 59 U.S. commercial banks in the survey said they lowered lending rates from May through July to attract large and medium-size corporate borrowers.

About a fifth of the respondents said they reduced rates for small- business customers.

The Fed said credit standards are holding up, with just "small fractions" of banks easing terms for commercial and industrial loans.

Bankers were optimistic about future loan quality, with more than half expecting quality to improve and 33% expecting it to remain unchanged.

Economists said the report shows that the industry easily survived sluggish growth and inventory reductions in the spring.

"Banks are reasonably satisfied with what is going on right now," said Sung Won Sohn, chief economist at Norwest Corp.

"The industry still looks quite healthy, especially on the retail side," added Lynn Reaser, chief economist at First Interstate Bancorp.

Ms. Reaser, who heads the American Bankers Association's economic advisory committee, said the rate reductions on business loans is not surprising. The auto industry and a number of other manufacturers have been reducing their inventories all spring. They don't need to borrow as much, leaving bankers with more money than customers, she said.

Business expanded rapidly on the retail side, where demand for mortgages and consumer installment loans increased from May through July.

More than 60% of loan officers said demand for residential mortgages was stronger, and 31% said demand was up for commercial real estate loans.

A quarter of the bankers said demand for consumer installment loans rose this summer after remaining flat the preceding two quarters.

The sharp jump in home mortgage demand, spurred by falling rates, also was widely expected, said Nicholas Perna, chief economist at Shawmut National Corp.

"That is not any kind of leading indicator of economic activity," Mr. Perna said. "It is reflection of what has been going on."

There is no guarantee that demand will remain strong, he said.

Mr. Sohn said banks are holding the line on credit quality, fearful that an economic downturn could spell trouble.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.