Fewer banks are erecting new hurdles for people and businesses to get loans, a fresh sign credit problems are easing.
In a quarterly survey released Monday, the Federal Reserve found that "commercial banks generally ceased tightening standards on many loan types" at the end of last year. The one exception: commercial real-estate loans.
Even though banks aren't imposing new restrictions on most loans, they aren't ready to ease the tough loan standards put in place during the financial crisis. Banks "have yet to unwind the considerable tightening that has occurred over the past two years," the Fed said.
Meanwhile, demand for home mortgages and other consumer loans weakened, a sign consumers are leery of making big-ticket purchases given double-digit unemployment and the fragile economic environment.
Consumers will help support economic growth, but they won't lead it by going on spending sprees. That's one main reason why the recovery this year is supposed to be modest rather than booming.
"The recent contraction in bank credit formation may owe more to weak demand, than weak supply, a story which might not resonate politically but which nonetheless seems to be supported by the data," said Michael Feroli, economist at JPMorgan Chase.
Last week the Federal Reserve decided to hold interest rates at record lows near zero to nurture the recovery. In doing so, Fed policymakers noted that bank lending continued to shrink. The White House has prodded banks to step up lending.
Looking ahead, "significantly fewer" banks expected widespread deterioration in the value of the loans they hold this year, the Fed said. That's an improvement from the prior two years, the Fed said.
On the consumer end, some banks indicated that the credit quality of home equity loans and home mortgages held by prime borrowers would likely erode further in 2010. But many banks expected little deterioration in the value of other types of consumer loans.
Furthermore, banks are anticipating further erosion in the value of commercial real estate loans this year. Small banks have been especially hit by soured commercial real-estate loans. That's crimped lending to small businesses.
Normally during economic recoveries, small businesses play a key role in job creation. But problems getting credit have made it more difficult for small businesses to get the financing to expand operations and hire.