U.S. banks eased standards and terms on loans to businesses ascommercial lending led a credit thaw, according to aFederal Reserve survey.

“Domestic banks, on balance, reported having eased their lendingstandards and having experienced stronger demand in several loancategories over the past three months,” the central bank said inits quarterly survey of senior loan officers released in Washingtontoday. The fraction of banks easing standards for business loanswas described as “relatively large.”

The Federal Open Market Committee reviewed the report at ameeting last week before reiterating that economic growth willprobably “proceed at a moderate pace” even against a headwind fromgovernment spending cuts. The FOMC signaled it may step up monthlybond buying beyond $85 billion if the need arises to overcome aslump in growth or a decline in inflation.

“The government is tightening its belt but the private sector isramping up its borrowing activity,” said Harm Bandholz, chief U.S.economist for UniCredit Group in New York. “That's the reasonausterity in the U.S. is not hurting growth as much as you'd thinkif you just looked at the fiscal situation.”

Stock prices and bond yields remained higher following thereport. The Standard & Poor's 500 Index rose 0.3 percent to1,619.21 at 2:45 p.m. in New York, while the yield on the 10- yearTreasury note climbed to 1.77 percent from 1.74 on May 3.

“Bank credit for households and businesses is critical tocontinued economic expansion,” Fed Chairman Ben S. Bernanke said inspeech on April 8. “It is positive for the recovery that banks arealso notably stronger than they were a few years ago.”

Demand for business loans increased even as “such reports wereless widespread than in the previous survey,” today's reportshowed. Banks that eased standards for business loans “generallycited increased competition for such loans as an important reasonfor having done so.”

Banks in the U.S. have boosted lending as the economy gainsstrength. The total value of loans at U.S. banks climbed 4.1percent in the past year to $7.3 trillion in March, according to aFed report last week. Lending to businesses has led the way, withcommercial and industrial loans climbing to $1.54 trillion inMarch, an increase of 11 percent from a year earlier.

“On the household side, the survey results were more mixed,” theFed said. A “few” banks eased standards on prime residentialmortgages, and demand for prime mortgages rose for the fifthconsecutive time, the Fed said.

Rising Demand

Banks eased standards and saw rising demand for both credit cardand auto loans, while standards and demand for other consumer loanswere “about unchanged.” The share of banks easing standards wasdescribed as “small.”

The survey of loan officers at 68 domestic banks and 21 U.S.branches and agencies of foreign banks was conducted from April 2to April 16, the Fed said. The report doesn't identifyrespondents.

A special set of questions asked about lending to Europeanbanks. Banks reported their standards with European counterparts“remained basically unchanged over the past three months, the firsttime there was no additional tightening since the introduction ofthis special question in the October 2011 survey.”

Expanded lending has helped U.S. banks outperform the S&P500 Index. The KBW Bank Index of 24 financial institutions hasclimbed 22 percent during the past year, compared with 18 percentfor the S&P 500.

The central bank has tried to improve the flow of credit byholding its target interest rate near zero, undertaking threerounds of bond purchases and increasing its surveillance to ensurebanks could lend during a severe downturn.

In the latest round of stress tests, released in March, the Fedsaid 17 of the 18 largest U.S. banks could withstand a deeprecession and maintain their capital levels above a regulatoryminimum.

New York Fed President William C. Dudley said lending for homesand cars has helped the economy withstand budget cuts inWashington.

“We have seen considerable strength in the interest- sensitivesectors of the economy, including housing, autos and durable goods,in spite of the uncertainty and drag from fiscal policy,” Dudleysaid in a March 25 speech in New York.

Budget cuts known as sequestration took effect on March 1. TheCongressional Budget Office has estimated the cuts will trim thenation's gross domestic product this year by 0.6 percentagepoint.

Even with the cuts, the U.S. economy added 165,000 jobs inApril, and the unemployment rate dropped to 7.5 percent, the lowestlevel in more than four years, according to a Labor Departmentreport last week. The economy grew 2.5 percent in the firstquarter, according to a separate report from the CommerceDepartment last month.

Wells Fargo & Co., the largest U.S. home lender, posted arecord $5.17 billion profit in the first quarter. Chief ExecutiveOfficer John Stumpf said credit losses declined to the lowest levelsince 2006.

“Our credit losses reflected the benefit of a slowly improvingeconomy and the high quality loans we've been originating over thepast few years,” he said on an April 12 earnings call.

Bloomberg News

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