Silencing the Credit Crunch : Banks: Some are eager to lend money. But with the recovery still anemic, persuading borrowers hasn't been easy.


In New England last Monday, the governors of Massachusetts, Connecticut and Rhode Island joined Bank of Boston's chairman in a whirlwind series of press conferences announcing that the bank is committing $3 billion in business loans to the credit-starved region.

At Chemical Bank, loan officers have been blitzing the New York area to tell businesses that the nation's third-largest bank has money to lend. And Federal Reserve officials report that although lenders are not loosening their standards, they have at least stopped tightening them.

These developments, say industry officials, are evidence that the much-touted credit crunch that some blame for the economy's lingering troubles is slowly easing as the recovery creeps along. Lenders say they are not only willing, but eager, to make loans. Small businesses that complained a year ago that lenders shunned them say that situation is changing, albeit slowly.

"It's improving by inches," said Cy Faries, who runs Colorful Products Corp., a Ventura County maker of cosmetics and personal care products.

The reasons are varied. Confidence is growing that the national recovery is real, despite such setbacks as a steep drop in housing starts disclosed last week. Pressures from regulators aren't as acute for many banks as they were a year or two ago. Lenders who have been preoccupied with stemming the red ink from bad loans are more confident that they have a grip on their problems.

"We wanted to let people know that if you think there is a credit crunch, here is a bank saying, 'Forget it,' " Bank of Boston Chairman Ira Stepanian said of his bank's publicity blitz last week.

Persuading people hasn't been easy. About 800 Chemical Bank officers swarmed over New York in February, handing out Nestle's Crunch candy bars to send a message to business clients that the credit crunch is over.

The bank's chief economist, Irwin L. Kellner, said the blitz succeeded in making people aware that the bank has money to lend. But he added that the effort was frustrated by the continuing reluctance of many businesses to borrow to expand inventories because they lack confidence that the economy is turning up.

"There is still a feeling out there that money is hard to come buy, or the feeling on the part of potential borrowers that they don't have a legitimate use for money now. They don't see any business reason for borrowing," Kellner said.

To be sure, banks aren't giving away money, even the ones publicizing their willingness to lend. In fact, getting a loan these days seems downright tough when compared to the loose-money days of the 1980s when the economic boom was in full swing.

And it remains tight in areas such as California that are not on the front end of the economic recovery. Also hurting California is a retrenching by Japanese banks, caused by the struggling Japanese economy. Japanese banks control about a quarter of the loans and other assets in the state.

Loans also remain hard to come buy for new businesses, and remain difficult to get for businesses in low-income areas. In addition, getting a loan is nearly impossible in some industries, mainly commercial real estate and construction.

"A lot of small businesses are still having some difficulties. And if you talk to people in commercial real estate, they are having a heck of a problem," said Deputy Treasury Secretary John Robson.

As President Bush's point man on the credit crunch, Robson has been jawboning lenders lately to come out of "hibernation" and start lending again rather than investing deposits in safe government securities.

The credit crunch, which some argue has crimped the economy for nearly three years, came to the fore of the public agenda last fall when the Bush Administration began to blame it for extending the recession. The Administration leaned on bankers to loosen their purse strings and on regulators to lighten up on enforcing credit standards.

Not everyone agrees that the credit crunch is over because not everyone agrees it existed in the first place. The term itself has been controversial because there is a wide range of opinion on how to define it, or whether there has been a true shortage of credit.

Those who believe in the credit crunch argue that businesses that are good lending risks have gone begging for money--blunting the nation's economic recovery--because lenders have set such high standards for getting loans. They argue that banks have been inhibited from lending to businesses, partly because they are being cautious in a soft economy but also because of increased scrutiny from bank regulators. (For consumers, the credit crunch was never as bad as it has been for businesses, although mortgage lending has tightened some with lenders requiring more documents, higher down payments and showing more caution on appraisals.)

But others characterize the credit crunch as a myth, saying that lenders have understandably cut back on lending as they would during any recession.

Jerry Jordan, president of the Federal Reserve Bank of Cleveland and until recently chief economist for Los Angeles-based First Interstate Bancorp, told a conference in Chicago earlier this month that there is little evidence pointing to a nationwide credit crunch over the last two years. What has happened, Jordan argued, is a burst in the speculative commercial real estate bubble along with wrenching changes in some industries and in some regional economies.

Likewise, Richard Syron, president of the Federal Reserve Bank of Boston, said at the same conference that he does not believe, as some do, that a credit crunch was a major factor behind the recession.

Some bankers, such as BankAmerica Corp. Chief Executive Richard M. Rosenberg, even cringe at the mere mention of a credit crunch, because the phrase implies banks are refusing to lend. Rosenberg said banks have money and don't make a profit if they refuse to lend it. Rosenberg argued that there are fewer credit-worthy borrowers because of the soft economy, and what good borrowers there are have been reluctant to take out loans for the same reason.

But Robson and others cite strong anecdotal evidence that the credit crunch has been real, just as there is some anecdotal evidence that it is easing.

"It's hard for me to believe you would not find a relative consensus" about the credit crunch, Robson said. "Banks will tell you demand is way off, and they are right. But in addition to demand, there has been a change on the supply side and a change in lending standards."

Faries, the Ventura County businessman, said he felt the credit crunch when he started receiving more scrutiny from his bankers--even though he was a founder of the bank--after the average length of time his customers took to pay him rose from 38 days to nearly 50 days. That was an indication that his customers were having a tougher time paying bills. Faries said his bankers now require more money invested in the business, and are authorizing smaller loans.

"They look at me in the same light as anyone else," Faries said. "They are getting tougher in extending loans. They have to see a pay-back."

And even though credit is loosening, the rules have clearly changed, resembling the more conservative, pre-1980s environment. Gone are the days when some developers could get projects financed without putting up a dime of their own money.

Affected aren't just the highflying developers, but even the kind of quality builders bankers used to aggressively court. Orange County home builder William Lyon, for example, has found credit so tight that he is now looking to raise money abroad, including in Hong Kong.

The drying up of money for construction has been acute in California. Exacerbating the credit crunch in real estate in California is the tightening of purse strings by Japanese banks, which have historically been heavily involved in real estate.

Dataquick, a La Jolla information service, said recorded construction loans from January through April totaled $2.87 billion statewide, about one-third the levels of 1989 and 1990. Southern California's $1.79 billion in construction loans is running about a quarter what it was in 1989.

Some suggest that as low as rates are now, they need to drop further to stimulate significant demand. Chemical Bank dropped its prime rate to 6.25% last month from 6.5%. But other banks failed to follow.

In recent weeks, there have been a few signs that businesses want to borrow to expand. A survey by the National Federation of Independent Business, for example, shows only 4% of small businesses responding listed financing as the hardest problem of running a small business.

Fred Furlong, an economist with the Federal Reserve Bank of San Francisco, also noted that while business loans are not expanding significantly, the aren't shrinking either. "Business lending, instead of contracting, is bottoming out," Furlong said.

Likewise, Faries has noticed an easing among bankers, but he doesn't attribute it to any numbers. He said what he is noticing is an "attitude" by bankers toward lending.

"Compared to a year or two ago, it certainly is more severe. But compared to three months ago, it's a little easier," Faries said.

Loosening the Purse Strings

A recent pickup in loans by the nation's commecial banks may indicate that the credit crunch, in part blamed for the lingering recession, is finally starting to ease. However, the growth in business and real estate loans, particularly in California, is still weak.

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