Banks across the nation made fewer business loans in the second quarter, largely because of weaker loan demand and deteriorating creditworthiness, according to a quarterly Federal Reserve survey of senior loan officers released on Monday.

A smaller percentage of banks tightened loan standards in the May-through-July period, compared with the last survey, released in April.

But loan demand was down in every category except prime residential mortgages, which are home loans to the most creditworthy borrowers, according to the survey.

About 45 percent of U.S. bankers reported weaker demand for commercial and industrial (C&I) loans from large firms during the period, and 55 percent indicated weaker demand from small firms. That was down slightly from the last survey, in which 60 percent of loan officers reported weaker demand for C&I loans from large firms and 65 percent saw weaker demand from small firms.

The bankers that reported weaker C&I loan demand unanimously cited customers’ shrinking need to invest in plant or equipment as the reason, according to the survey. Other key reasons included decreased needs to finance inventories, accounts receivable, and mergers or acquisitions.

Fifty-five percent of bankers said that their standards were currently tighter than usual for C&I loans to investment-grade firms, and that they expected that to continue well into 2011.

Nearly all banks said that current standards for commercial real estate loans were higher than long-term average levels. About 40 percent expected standards to return to normal by the second half of 2010 or in 2011.

But nearly 90 percent of bankers said that lending standards were tighter than usual for both prime and nonprime residential real estate lending, including home equity lines of credit.

The full report can be read here.

Denver Business Journal