WASHINGTON - Worried about economic prospects, bankers are growing increasingly cautious about lending to business borrowers, but so far haven't tightened credit to households, a Federal Reserve survey found.

"The survey results suggest a broad tightening of business lending practices," the Fed Said Friday.

"Citing increased concern over the economic outlook, a large share of the participants indicated they had firmed standards and terms on loans to large and middle market businesses and on commercial real estate loan," it said.

The findings almost certainly played a role in Fed policy makers' decision Tuesday to cut short-term rates a third time in seven weeks. They reduced the benchmark rate on overnight loans between banks to a four-year low of 4.75 percent.

Economists said the central bank's swiftness to respond to the tightening credit conditions by cutting interest rates should stave off a full-blown credit crunch that could derail the nearly 8-year-old economic expansion.

"This is not a trivial matter," said economist Ken Mayland of KeyCorp in Cleveland, Ohio. "But the fact that the Fed has acted pre-emptively will help prevent it from becoming a fatal vulnerability."

The Fed first detected tightening credit conditions in a mid-September survey, "found little evidence of any changes in lending practices on loans to households." A few banks said they actually had become more willing to make consumer installment loans while a "moderate percentage" said they had tightened standards on credit cards.

In September, large businesses were most affected by tighter credit. But, this month, the difficulties had spread to medium-sized business borrowers and "some banks also reported having tightened standards and terms on loans to small businesses."

The Fed questioned senior loan officers at 55 mostly large banks that represent nearly half the industry. More than a third of the U.S. banks and two-thirds of the foreign-owned banks said they had adopted stricter standards for lending to large and medium-sized American companies. In September, only a quarter of the U.S. banks and two-fifths of the foreign banks had tightened

"A less favorable or more uncertain economic outlook was the most commonly cited reason for having tightened, the Fed said. "Many banks also cited…industry-specific problems, a reduced tolerance for risk and less aggressive competition from other banks and nonbank lenders."

In fact, the survey showed that demand for both business and commercial real estate loans had increased because businesses were having trouble raising money in the stock and bond markets.

Copyright 1998. This article first appeared in the Houston Chronicle, Business Section, on November 21, 1998. Submitted by Associated Press, Washington. Reprinted by permission from the director. All rights reserved.