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

“Domestic banks, on balance, reported having eased their lending standards and having experienced stronger demand in several loan categories over the past three months,” the central bank said in its quarterly survey of senior loan officers released in Washington today. The fraction of banks easing standards for business loans was described as “relatively large.”

The Federal Open Market Committee reviewed the report at a meeting last week before reiterating that economic growth will probably “proceed at a moderate pace” even against a headwind from government spending cuts. The FOMC signaled it may step up monthly bond buying beyond $85 billion if the need arises to overcome a slump in growth or a decline in inflation.

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

Stock prices and bond yields remained higher following the report. The Standard & Poor's 500 Index rose 0.3 percent to 1,619.21 at 2:45 p.m. in New York, while the yield on the 10- year Treasury note climbed to 1.77 percent from 1.74 on May 3.

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

Demand for business loans increased even as “such reports were less widespread than in the previous survey,” today's report showed. Banks that eased standards for business loans “generally cited increased competition for such loans as an important reason for having done so.”

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

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

Rising Demand

Banks eased standards and saw rising demand for both credit card and auto loans, while standards and demand for other consumer loans were “about unchanged.” The share of banks easing standards was described 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 2 to April 16, the Fed said. The report doesn't identify respondents.

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

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

The central bank has tried to improve the flow of credit by holding its target interest rate near zero, undertaking three rounds of bond purchases and increasing its surveillance to ensure banks could lend during a severe downturn.

In the latest round of stress tests, released in March, the Fed said 17 of the 18 largest U.S. banks could withstand a deep recession and maintain their capital levels above a regulatory minimum.

New York Fed President William C. Dudley said lending for homes and cars has helped the economy withstand budget cuts in Washington.

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

Budget cuts known as sequestration took effect on March 1. The Congressional Budget Office has estimated the cuts will trim the nation's gross domestic product this year by 0.6 percentage point.

Even with the cuts, the U.S. economy added 165,000 jobs in April, and the unemployment rate dropped to 7.5 percent, the lowest level in more than four years, according to a Labor Department report last week. The economy grew 2.5 percent in the first quarter, according to a separate report from the Commerce Department last month.

Wells Fargo & Co., the largest U.S. home lender, posted a record $5.17 billion profit in the first quarter. Chief Executive Officer John Stumpf said credit losses declined to the lowest level since 2006.

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

Bloomberg News

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Business Loans Lead Credit Thaw, Fed Says

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