U.S. banks tightened their standards for loans to European banks and fewer relaxed lending standards to businesses in the third quarter, the Federal Reserve said Monday.
The Fed's quarterly senior-loan-officer survey, based on 51 domestic banks and 22 U.S. branches of foreign banks, showed that about two-thirds of banks that make loans to their European counterparts had tightened standards for those loans in the July-to-September quarter, reflecting growing uncertainty in financial markets over Europe's sovereign-debt crisis.
"Many domestic banks indicated that the tightening was considerable," the Fed said about lending to European banks. The central bank added a set of special questions about lending to Europe to the survey, conducted in early October. About half of the domestic banks in the survey said they make loans or extend credit lines to European banks.
Banks can impose tighter standards on businesses and consumers by limiting the size of loans, demanding more collateral or higher down payments and charging higher fees.
The report "underscores the fallout from the heightened economic uncertainty that prevailed during the late summer months when concerns about a second economic recession was pervasive," wrote Millan Mulraine, an economist with TD Securities, in a note to clients.
The Fed survey, taken in early October, showed fewer banks continued to relax their business-lending standards in the third quarter, compared with a broader trend of such easing in previous quarters.
The slower pace of a loosening in standards reflected a more uncertain economic outlook, the Fed said. In a reversal from recent quarters, reports of weaker demand for business loans outnumbered reports of stronger demand, the central bank said. That trend was especially pronounced among midsize and larger firms.
Many banks, especially smaller ones, say they have yet to see a rebound in demand for loans due to the weak economy. "We are ready to lend. We've never shut off the faucet, but I can't create loan demand," said Sal Marranca, chief executive officer of Cattaraugus County Bank in Little Valley, N.Y.
While credit conditions are slowly returning to normal, they remain much tighter than before the financial crisis of 2008. Fed policy makers reiterated last week that U.S. short-term interest rates are likely to remain close to zero at least through mid-2013, a move first announced Aug. 9.
The central bank will also continue to increase its holdings of long-term Treasurys, a step unveiled Sep. 21 in an effort to push down long-term interest rates. Both moves are aimed at boosting a persistently weak economy by getting consumers and companies to borrow and spend more.
Still, banks appear cautious. In particular, standards for home loans remain tight, leading many in the real-estate industry to complain that overly restrictive standards are hurting the housing market.
The Fed survey found more banks reporting stronger demand for new mortgage loans to purchase homes amid the lowest mortgage rates in decades. However, the report said few banks relaxed their lending standards to make it easier for consumers to buy a home.