US Loan Demand Still Anemic

According to the central bank and government studies, the US demand for loans fell in the second quarter for every major category bar prime residential mortgages due to tightened credit standards set by the banks making the borrowers cautious.

The US Federal Reserve observed in its quarterly survey of senior loan officers, conducted between July 14 and July 28, that the percentage of banks that tightened loan standards for business and households was slightly lower than in the first quarter.

According to the report published on Monday, the majority of institutions maintained the previously tightened standards, and virtually none eased standards over the previous three months.

The Fed has pumped hundreds of billions of dollars in liquidity and lending support into financial markets in the past year in order to bring the worst financial crisis since the 1930s Great Depression to an end. More than $200 billion has been given as direct capital from the US Treasury.

The Fed had announced earlier on Monday that it would extend an emergency lending program in order to support the commercial real estate market until mid 2010.

But the survey showed that the public sector support has done little to spur demand for loans in the face of a deep recession.

The only major category to show an improvement in loan demand was of Prime mortgages, but the pace of the improvement has also slowed from April, when interest rates were lower.

Some of the domestic banks name lower customer funding needs as the reason for the reduced demand, whereas some foreign owned banks quote the top reason as a decline in borrower creditworthiness.

Another US Treasury Department survey considering the top 22 banks who are receiving government assistance showed that their total average loan balance fell $45.7 billion, or 1.1% in June to $4.295 trillion.

The treasury stated that the economic uncertainty has caused borrowers to downsize, cut costs, reduce inventories and delay capital expenditures, thus slowing down the economic recovery process.

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Tagged as: Banks, borrowers, capital expenditures, central bank, credit, creditworthiness, dollars, domestic banks, emergency lending program, financial crisis, financial markets, government, government studies, Great Depression, households, inventories, liquidity, Loans, Mortgage, Prime mortgages, public sector, U.S. Federal Reserve, US demand, US Treasury Department