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UPDATE 1-Bank loan standards ease, loan demand up -Fed survey

WASHINGTON, Oct 31 (Reuters) - The U.S. Federal Reserve said on Wednesday that some banks continued to ease lending standards for businesses and consumers in the last three months, while a number reported better bo r rower appetite for real estate and auto loans.

``Significant fractions of banks reported a strengthening of demand for commercial real estate loans, residential mortgages, and auto loans, on balance,'' the Fed said in its October survey of senior loan officers. ``Demand for most other types of loans was about unchanged.''

The U.S. central bank has cut interest rates almost to zero and last month announced a third round of so-called quantitative easing to further drive down borrowing costs in the hope of encouraging businesses to invest and hire more U.S. workers.

Easier lending standards for commercial and industrial loans was more widespread than in the July survey, and the biggest reason given was increased competition for business.

``Of the respondents that reported having eased either standards or terms over the past three months, almost all cited more aggressive competition from other banks or nonbank lenders as an important reason for doing so,'' the Fed said.

U.S. officials have been frustrated by the slow pace of the economic recovery, which accelerated to a 2 percent annual rate in the third quarter, but remains insufficient to significantly lower unemployment levels that were 7.8 percent in September.

The scarcity of credit, particularly for smaller companies wanting to expand, has been cited by analysts as a possible explanation for the tepid nature of the recovery, although others blame a lack of demand and credit-worthy borrowers.

The quarterly poll of 68 domestic U.S. banks and 23 branches and affiliates of foreign firms, also examined lending to European banks and found that loan standards for these entities had continued to tighten.

A prolonged European sovereign debt crisis has increased concerns about the credit quality of European lenders as the result of steep losses on government bonds issued by some euro-zone members, including Greece, Ireland, Portugal, Spain and Italy.

U.S. banks, fearing contagion, have taken extra care to control their exposure to European loan counterparties as a result, although the Fed said the trend might be softening.

``The fractions of respondents indicating that they had tightened standards declined significantly between the July and October surveys, on net,'' the Fed said.

Also, a small majority of the domestic U.S. banks who vie directly with foreign rivals for customers said they had seen less competition from this source over the last three months, and some said that this had helped them boost their business.