Demand for business loans weakened in the second quarter even though banks eased restrictions on their lending, according to the Federal Reserve.

The Fed’s July survey of senior loan officers found a quarter of U.S. banks said demand for C&I loans from large and middle-market firms weakened, while 20% of banks reported that demand from small firms did so.

At least half of the banks that reported weaker demand cited shifts in customer borrowing to other bank or nonbank sources, decreases in customers’ needs to finance inventory, accounts receivable, investment in plant or equipment, and mergers or acquisitions.

At the same time, the Fed found standards for C&I loans were basically unchanged over the past three months for loans to firms of all sizes, but terms became less restrictive, on balance, with specific loan terms all either easing or remaining basically unchanged.

“Specifically, a significant net percentage of banks reportedly narrowed spreads of loan rates over the cost of funds, while a moderate net share of banks reportedly increased the maximum size of credit lines and decreased the use of interest rate floors for large and middle-market firms,” the central bank said.

The survey results are line with other data showing weakness in business spending. The Commerce Department reported last week that businesses increased fixed investment just 2.2% in the spring after a 8.1% gain in the first quarter.

On Monday, Fed Chairman Stanley Fischer said policy makers are puzzled that business investment has been “tepid” despite historically low interest rates.

For consumer lending, banks reported easing residential real estate loan standards in the second quarter but not by very much. Demand also strengthened a bit.

Survey respondents also said they continued to tighten standards on commercial real estate loans while demand weakened on net. “This should make the Fed happy as some top officials at the central bank have expressed concerns about a possible bubble in the sector,” MarketWatch said.

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