Fewer banks eased standards on loans to businesses in the thirdquarter, and lenders tightened standards on credit to Europeanbanks and their affiliates, according to a Federal Reservesurvey.

Banks were slightly more likely to ease than tighten theirstandards on credit, “in contrast to more widespread reports ofsuch easing in previous quarters,” the central bank said today inits quarterly survey of senior loan officers. Banks that raisedtheir standards “cited a less favorable or more uncertain economicoutlook as a reason for the tightening.”

Fed Chairman Ben S. Bernanke and his colleagues on the FederalOpen Market Committee are struggling to boost an economy so weakthat unemployment has been near 9 percent or higher for 31consecutive months. In a press conference last week, Bernanke saidthe expansion is hampered by “still-tight credit conditions” formany households and small businesses and that “monetary policy hasbeen blunted” by the dysfunctional mortgage market.

In a special set of questions on lending to firms with Europeanexposure, about half of U.S. banks said they made loans or extendedcredit lines to European counterparts. About two- thirds of allbanks that made loans to European banks tightened their standards,and many “indicated that the tightening was considerable.”

U.S. economic growth quickened in the third quarter to a 2.5percent annual rate, after a 0.4 percent pace in the first quarterand 1.3 percent in the second. Employers added 80,000 employees totheir payrolls in October, and the unemployment rate dipped to 9percent.

The survey of loan officers at 51 domestic banks and 22 U.S.branches and agencies of foreign banks was conducted from Oct. 4 toOct. 18, the Fed said. The report doesn't identify respondents.

“This was taken over a period when there was intense uncertaintyabout where the U.S. and world economy was headed,” said MillanMulraine, senior U.S. strategist at TD Securities in New York. “Youwould fold your wings when you're not certain about where thingsare headed, so this report, while disappointing, should be seen asmostly transitory.”

The Standard & Poor's 500 Index advanced 11 percent inOctober, the best since 1991, as European leaders agreed to expandtheir bailout fund. The rally snapped five months of losses.

U.S. stocks rose following the report after the European CentralBank's Juergen Stark said the region's debt crisis will be undercontrol in two years at the latest. The S&P 500 was up 0.3percent at 1,256.77 as of 2:55 p.m. in New York. The yield on the10-year Treasury declined 4 basis points to 1.99 percent. A basispoint is 0.01 percentage point.

Demand Weakened

The survey showed that demand for commercial and industrialloans weakened in the third quarter, a reversal from recentquarters. Banks saying they tightened standards on such loans cited“reduced tolerances for risk, decreased liquidity in the secondarymarket, and increased concerns about the effects of governmentpolicies” as well as uncertainty about the economy.

Banks reported tightening standards on nonfinancial firms thathave significant exposures to European economies. These loans were“a small portion — less than 5 percent” of outstanding businessloans at a majority of respondents, the Fed said.

Banks were more likely to ease than tighten standards onconsumer credit-card loans and other non-auto loans, the surveysaid. They were also more likely to report “strengthening demandfor consumer credit card and auto loans, in line with the past fewquarters.”

A measure of consumer confidence declined last week to itslowest level since the depths of the recession in the first quarterof 2009. The Bloomberg Consumer Comfort Index fell to minus 53.2 inthe week ended Oct. 30, the second-lowest reading in almost 26years of data. The gauge has held below minus 50 for six of thepast seven weeks, a period unmatched even during the 2008-2009economic slump.

Consumers have continued to spend even as their confidenceremains battered. Household purchases, the biggest part of theeconomy, increased at a 2.4 percent pace in the third quarter, morethan projected by economists.

Bank of America Corp., the second largest U.S. bank by assets,last month swung to a third-quarter profit, with the bottom lineboosted by higher revenue and better credit quality. The bank'sprovision for loan losses dropped to $3.4 billion from $5.4 billiona year earlier as credit improved in the card unit and commerciallending, the bank said.

Credit Quality

“We continue to see solid performance in our commercial andcorporate lending businesses,” Brian Moynihan, the bank's chiefexecutive, said in an Oct. 18 earnings call. “Our credit qualityand delinquencies continue to improve, while reserve coverageremains at high levels.”

Standards on commercial real estate loans were little changed,the Fed survey said. In the last survey, such standards werereported as being “at or near their tightest levels since2005.”

Commercial real estate prices plunged 49 percent from October2007 to a 10-year low in April 2011 of this year. While prices haverisen since April, they remain 41 percent below their 2007 peak,according to the Moody's Commercial Property Price Index.

“Reports of strengthened demand for mortgage loans to purchasehomes outnumbered reports of weaker demand for the first time sinceearly 2010, perhaps reflecting refinancing activity,” today's Fedreport said.

Mortgage rates near record lows have failed to revive thehousing market after five years of price declines. The average30-year fixed rate mortgage was 4 percent as of Nov. 3, accordingto a Freddie Mac index. The index reached the lowest level in 40years in October when rates fell to 3.94 percent.

Residential real-estate prices dropped 3.8 percent in the 12months through August and remain 31 percent below their 2006 peak,according to the S&P Case-Shiller home price index in 20cities.

Bernanke last week said buying more mortgage-backed securitiesis a “viable option” for the central bank. “The housing sector is avery important sector,” and adding to mortgage-bond holdings is“certainly something we would consider if conditions” areappropriate, he said.

Bloomberg News

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