U.S. loan demand fell in the second quarter for every major category bar prime residential mortgages as banks tightened credit standards and borrowers remained cautious, central bank and government studies showed.
In its quarterly survey of senior loan officers, conducted between July 14 and July 28, the U.S. Federal Reserve said the percentage of banks that tightened loan standards for business and households was slightly lower than in the first quarter.
But the majority of institutions maintained previously tightened standards, while virtually none eased standards over the previous three months, according to the report published on Monday.
The Fed has pumped hundreds of billions of dollars in liquidity and lending support into financial markets in the past year in response to the worst financial crisis since the 1930s Great Depression, in addition to more than $200 billion in direct capital injections from the U.S. Treasury.
Earlier on Monday, the Fed announced it would extend an emergency lending program to support the commercial real estate market until mid 2010.
The survey showed public-sector support has done little to spur demand for loans in the face of a deep recession.
Prime mortgages was the only major category to show an improvement in loan demand, but the pace of the improvement also slowed from April, when interest rates were lower.
About 15 percent of banks reported an increase in demand for mortgages from top borrowers, compared with 35 percent in April — which showed the first improvement since early 2007.
Among commercial and industrial loans, 45 percent of domestic banks reported decreased demand from small firms, while 55 percent reported less interest from small firms.
In a special question asking banks to rank reasons for the reduced demand, domestic banks cited the top reason was lower customer funding needs. Foreign-owned banks cited the top reason as a decline in borrower creditworthiness.
About 30 percent of domestic banks reported tighter standards for commercial and industrial loans in the July survey, down from about 40 percent in April and 85 percent in November 2008.
Lower Loan Balance in Treasury Survey
A separate U.S. Treasury Department survey of the top 22 banks receiving government assistance released on Monday showed their total average loan balance fell $45.7 billion, or 1.1 percent in June to $4.295 trillion.
New loan originations rose $35.1 billion in June to $312.1 billion, a significant rise from the paltry $3.7 billion increase in originations at these banks. The Treasury survey showed commercial and industrial loan balances fell 2 percent in June at the 22 banks and remained well below pre-recession levels.
"Economic uncertainty has caused borrowers to downsize, cut costs, reduce inventories and delay capital expenditures," the Treasury said in a statement. "Lower overall merger and acquisition activity further contributed to the decreased demand for C&I credit."
The Fed survey showed standards for prime residential mortgages were tightened at a slower pace in the second quarter. About 20 percent of domestic banks tightened prime mortgage standards in the July survey, versus 50 percent in April and 75 percent a year ago.
Significantly fewer banks reported tighter standards for credit cards and consumer loans, but this did not translate to more demand for consumer credit. In fact, about 20 percent of banks surveyed said demand for all types of consumer loans fell in the prior three months, a few percentage points more than in the April survey.
The Treasury survey, based only on June — a month that some economists estimate as the end of the recession — showed flat credit card balances at the 22 banks with federal aid. The total outstanding balance of other consumer lending products fell 1 percent, with an uptick in auto loans offset by a seasonal decline in student loans.