Dec. 30 (Bloomberg) -- Members of Congress are complaining that Federal Reserve and Treasury officials aren’t forcing banks getting money under the Troubled Asset Relief Program to increase lending.

The politicians should stick to what they know.

Granted, more lending by the 165 banks that have gotten an infusion of capital might help the sagging economy. On the other hand, making billions of dollars of imprudent loans wouldn’t help either the economy or institutions already saddled with many nonperforming credits.

Aggregate data on bank balance sheets show that lending is increasing only slowly, if at all. Here’s one possible reason: The banking industry is getting conflicting messages from federal authorities.

Financial institutions that responded to a recent survey in the Minneapolis Federal Reserve Bank’s district said Treasury’s efforts to encourage banks to lend are running head on into bank examiners “doing exactly the opposite,” as a small bank in Montana put it.

Banks, leery about the ability of borrowers to repay loans in a recessionary environment, have tightened their lending standards, with larger institutions doing so more than smaller ones. Examiners, not surprisingly, are telling the banks to be cautious.

Lawmakers in Washington might be interested to learn that demand, too, is down. The reason cited most frequently by banks for the drop in new loans is fewer requests for credit from consumers and businesses, according to the survey. Fewer than 10 percent of banks, large or small, cited a lack of available funds as a reason for making fewer loans.

Fear Itself

“Fear is the greatest problem right now,” said a local chamber of commerce official in Minnesota quoted in the survey. “Business and banks are indicating that they have money to lend, but businesses are afraid of the future.”

If fear of the future is what’s depressing loan demand, what good does it do to pressure banks with TARP money to step up their lending?

The availability or cost of credit is also well down the list of what’s worrying small business owners, according to another recent survey, by the National Federation of Independent Business.

Only 9 percent of the group’s members said their biggest problem is an inability to obtain credit. By contrast, 45 percent of those surveyed cited slowing or lost sales. That was the top concern, followed by the overall unpredictability of the economic outlook.

Honoring Commitments

The survey found that, since Sept. 1, only 5 percent of small businesses with an active loan had a lender demand a change in terms. Of the 13 percent of respondents that sought a new loan, fewer than half got one, a rejection rate much higher than it would have been earlier this year, the survey summary said.

In other words, banks generally are honoring existing commitments. It’s harder to get new credit, though it is available, and only a small number of potential borrowers have been affected. The story is much the same with lines of credit.

What emerges from these surveys is that both borrowers and lenders are being more cautious, which only makes sense. The question for policymakers looking over the shoulder of the institutions with TARP money -- or those who haven’t gotten it -- is whether they are being too cautious.

Some politicians have complained when TARP recipients used the capital to take over an ailing institution -- such as the PNC Financial Services Group Inc. acquisition of National City Corp. -- rather than increase lending.

In fact, lawmakers should be cheering that merger. It probably avoided a takeover of National City by the Federal Deposit Insurance Corp. and a disruption of lending activities by the bank.

A Changed World

The world of credit has changed drastically this year. The disruptions have been much greater in credit flows outside the banking system than within it. In fact, many business borrowers have turned back to the banks when their usual sources of credit, such as the commercial paper market, have dried up.

As larger financial institutions have been squeezed by large losses on assets, including those back by subprime mortgages, some of the demand for credit has moved down the chain to smaller banks with more money to lend.

This evolution is one reason why it’s so difficult to pin down what actions, by the government or by individual institutions, are helping or hurting.

“Each individual financial institution’s circumstances are different, making comparisons challenging at best, and it is difficult to track where individual dollars flow through an organization,” Neel Kashkari, interim assistant Treasury secretary for financial stability, said in congressional testimony on Dec. 10.

Members of Congress don’t have any better information about what activity those dollars are supporting, and the politicians would be wise to remember they aren’t on the loan committee.

(John M. Berry is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: John M. Berry in Washington at jberry5@bloomberg.net

Last Updated: December 30, 2008 00:02 EST