New lending standards don’t lure small firms

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Banks loosened lending standards for small businesses over the past three months but demand for loans remained weak, the Federal Reserve said Monday.

It marks the second time in nearly four years that banks have made loans easier for small businesses to obtain, according to the Fed’s new quarterly survey. The first breakthrough came in August, when the previous survey was issued. The Fed defines small businesses as those with annual sales of less than $50 million.

Banks pointed to a more “favorable or less uncertain economic outlook” and increased competition as reasons for loosening lending standards.

Even so, demand for commercial and industrial loans declined over the last three months, especially for small firms, the Fed said.

On the consumer side, banks reported an increased willingness to make consumer loans. Some banks said they eased standards for approving credit card applications. However, a few banks said they reduced the size of credit lines on existing credit card cards and tightened terms for new applications.

During the height of the financial crisis in the fall of 2008, banks tightened sharply their lending standards on business and consumer loans. Despite the recent loosening of standards on some loans, it is still much harder to get a loan now than before the crisis. Banks told the Fed they didn’t think lending standards would return to more normal – and less restrictive conditions – until after 2012.