By Amy Higgins
The Cincinnati Enquirer

What good are lower interest rates if businesses still don't want to borrow money - and even if they did, banks would be more reluctant to lend it?

Indeed, within a week of lowering key interest rates, the Federal Reserve on Tuesday reported a drop in demand for commercial and industrial loans, and a continued tightening of banks' lending standards.

So even though businesses could borrow money at the lowest interest rates since July 1961, few are trying, and fewer would be approved.

And that isn't spurring the business investment spending that economists say would spark significant economic growth and definitively end the recession.

"There's no clear indication that it would make sense to make investments right now," said David Givens, associate economist at Economy.com. "Sure, banks are tightening their lending standards, but nobody's coming to them for money anyway."

During the second week of August (the last month for which figures are available), businesses borrowed $65.9 billion, according to Fed statistics. That's less than half the $141.2 billion loaned during the same week in August five years ago. Since 1997, lending in all risk categories has declined, despite loan rates dropping by about a third.

Additionally, 38 percent of the loans from August 2002 were secured by collateral - compared to just 29.5 percent in August 1997.

"Sources of financing are a lot leaner than they used to be," said George Vredeveld, director of the Economic Center for Education & Research at University of Cincinnati.

A quarterly Fed survey shows that banks started significantly tightening their credit standards in early 2000. By the end of that year, 60 percent of banks told the Fed they were tightening standards.

Provident Bank went through such a transformation during that time, largely because it was forced to charge off $222 million in problem loans in two years. The bad loans caused the parent company of the Cincinnati bank to report two quarters of losses last year.

Bad loans have plagued the banking industry in this recession, with total corporate bankruptcies rising 13 percent last year. Bond defaults also surged to record levels; Standard & Poor's reported 211 defaults last year totaling $115 billion.

Thus, the bank's tighter standards came as companies themselves were becoming more risky borrowers.

So without access to credit, their own profits or a welcoming stock market in which to raise capital, businesses have stopped spending. E-mail ahiggins@enquirer.com