Federal Reserve Chairman Alan Greenspan cut interest rates again last week, trying to restore consumer confidence and infuse some cash into the slowing economy.
As the rapid growth of the past few years has tempered, some banks have tightened their purse strings as corporate profits wane and the specter of bad loans rears its head. These days, a cutoff in business funding seems to be as alarming to Greenspan as his traditional nemesis, inflation.
“Lenders should be mindful that in their zeal to make up for past excesses they do not overcompensate and cut off the flow of credit to borrowers with credible prospects,” Greenspan told an Independent Community Bankers of America meeting in Las Vegas earlier this month. “There is doubtless an unfortunate tendency among some,I hesitate to say most,bankers to lend aggressively at the peak of a cycle and that is when the vast majority of bad loans are made.”
In Orange County, lenders say they’ve tightened lending standards and restructured some deals, but money still is flowing.
“We are still bullish on the Southern California economy,” said David Rainer, Southern California president of U.S. Bank, a unit of Minneapolis-based U.S. Bancorp. “We have not experienced any deterioration in our loan portfolio in Southern California. We are trying to gobble up as much business as we can.”
“Banks are experiencing more problems in their portfolios, but that hasn’t affected activity,” said Mary Curran, a senior vice president and division manager for Union Bank of California. “You structure your deals differently. You want more cash flow, more leverage, a reduced holding position and diversified risk.”
As with slowing in the national economy, though, the question is whether a larger trend toward tighter credit is yet to fully play out in OC.
According to a Federal Reserve survey, the number of domestic and foreign lenders that reported tightening standards and terms on commercial and industrial loans rose in the fourth quarter. The banks indicated that the most important reason for the shift was a worsening economic outlook and less tolerance for risk.
Almost 60% of domestic banks reported tightening standards on commercial and industrial loans to large and middle-market companies in the fourth quarter, and 45% reported tightening standards to small businesses in the same period.
A Federal Reserve survey of senior loan officers indicated that the tightening of credit began in late 1999 and has persisted through early 2001.
“We saw some potential softness 12 to 18 months ago and made some slight adjustment to policies and processes. It is serving us well today,” said David White, Southern California regional president with Detroit-based Comerica Bank. “It has not resulted in any change for our existing customers. It was mostly for new business and new customers.”
If the local economy contracts, rather than just grows at a slower pace, then banks could see trouble on the real estate front, where failed dot-coms already are a cause for some concerns.
“We are cycling out of a very hot growth economy into a slowing environment, with tougher business conditions, more bankruptcies expected and more failing companies,” said Norman Katz, managing partner at MCS Associates in Irvine, a real estate and financial services consultancy. “That clearly is translating into credit-quality problems in the portfolios. A lot of landlords are being left high and dry.”
At least one economist thinks the economy is fine and banks should continue lending as they have done.
“There is nothing structurally wrong with the U.S. economy,” said Kevin Bannon, senior vice president and chief investment officer of the Bank of New York on a recent visit to Southern California.
At least for now, competition, rather than fear, seems to be the driving force in local lending.
“The competition is still fierce for commercial loans,” said Comerica’s White. “There are a number of commercial finance companies that are looking for business as well.” n
