Fed's Looser Lending Standards Fail to Spur Small Businesses to Borrow

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The more lenient lending policies enacted by the Federal Reserve last month have so far failed to increase demand from small businesses, indicating that the federal government's attempts to spur the U.S. economy through more aggressive monetary policy may need more time to take effect.

The Fed, which surveys banks every other month, said in a report Monday that financial institutions loosened lending policies in October, just as they did in August. For firms with annual sales of less than $50 million, about 11% of banks eased their loan standards, while 4% tightened them. For larger firms, 12% of banks loosened policies while 2% tightened them, according to the Fed's survey.

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Still, almost a third of the banks surveyed said loan demand from smaller firms had weakened over the past three months, compared to the 7% that said demand was up. The more lenient lending standards were slightly more effective for larger firms, with 25% of the banks reporting that demand declined and 18% saying that demand increased, according to the Fed's report.

The results appear to indicate that President Barack Obama's attempts to spur the economy through better access to credit for small businesses may take time to be effective. Congress passed a bill in September designed to spur small-business lending by providing financial incentives to banks that make loans to smaller companies. Senate Democrats had estimated that the bill would create as many as 500,000 new jobs by using about $30 billion to encourage lending by investing in smaller banks while providing tax-breaks related to small businesses totaling about $12 billion.

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