WASHINGTON –  Banks in the U.S. kept credit fairly tight in the final months of 2011 even as demand for loans increased, putting a brake on the slow economic recovery.

The Federal Reserve's quarterly survey showed that credit standards on commercial and industrial loans were little changed for the 56 domestic banks that were interviewed, after the banks stopped relaxing credit in the third quarter. Meanwhile, the 23 U.S. branches of foreign banks, which mainly lend to businesses, reported a tightening of their lending standards.

Banks were cautious to extend credit even though demand for loans rose. U.S. banks "experienced somewhat stronger loan demand, on net, over the past three months," the Fed said. The percentage of banks reporting increased demand for commercial and industrial loans rose to the highest level since 2005. Foreign respondents, meanwhile, said loan demand was about unchanged.

Banks in the U.S. started to tighten credit in the second half of 2011 as Europe's debt crisis worsened, following seven quarters of easier standards on business loans. Tight credit is not good for an economy that, while showing signs of improvement, remains fragile. Gross domestic product, the value of all the goods and services produced in an economy, increased by only 1.7% in 2011.

Though there was little change in overall standards for business loans, the Fed survey found that banks eased pricing terms in the fourth quarter. On the household side, lending standards and demand for loans to purchase real estate were little changed at the end of last year.

The central bank posed a special set of questions about lending to European-based banks amid that continent's sovereign-debt crisis. Banks reported that they had tightened standards on loans to European banks, as well as to non-financial companies with exposures to European economies.

However, the European debt crisis may be benefiting U.S. lenders. About half of those surveyed who compete with European banks noted an increase in business as a result of less competition from European institutions.

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