Banks Clamp Down on Corporate Lending

Major banks operating in the U.S. have clamped down on their lending to large corporations to guard against deteriorating global economic conditions, the Federal Reserve Board said Thursday in a survey of bank loan officers.

“The banks that reported having tightened lending standards and terms most commonly attributed their decision to a less favorable economic outlook, a worsening of industry-specific problems, as well as reduced tolerance for risk,” it said.

The survey, normally scheduled for November, was conducted early in time for Tuesday’s meeting of the Fed’s Open Market Committee, which decided to cut short-term interest rates by a quarter of a percentage point to 5.25%. It was the first decline in interest rates since Jan. 31, 1996, and should lead to lower borrowing costs for everything from auto loans to home mortgages to capital loans for businesses.

“Because larger banks and foreign branches and agencies are more likely to be involved in the market for large syndicated credits, the pattern of tightening reported on the survey is consistent with anecdotal reports suggesting that conditions in that market have deteriorated in recent weeks,” the Fed said.

Almost 30% of the large banks--with assets greater than $15 billion--surveyed by the Fed had tightened standards. About 10% of the smaller banks had to do so.

A few banks reported increased collateral requirements on loans to larger customers. In addition, the banks said demand from businesses for loans had weakened because of fewer mergers and acquisitions and, to a lesser extent, reductions in new plant and equipment investment. A few banks said loan demand had been boosted by a shift from the junk bond market toward bank finance.

What’s more, loan demand from consumers has waned since mid-August, the Fed said.

Earlier this summer, Fed Chairman Alan Greenspan warned banks that lending standards were too lax, but last week he changed that view, saying he saw evidence that banks were tightening credit.

The world economy has worsened since July. Russia devalued its currency and defaulted on debt. Japan, South Korea, Thailand and Indonesia are in recession. And as concerns mounted that Brazil might devalue, the Federal Reserve Bank of New York brokered an unprecedented $3.6-billion rescue to prevent hedge fund Long-Term Capital Management from collapsing.

The last survey, released Aug. 24, said senior loan officers at U.S.-based banks saw no change in standards for loans to big and medium-sized firms, though standards for commercial real estate and some consumer loans have eased.

For medium-sized and large businesses, the Fed survey found “no changes, on net” in bank lending standards during the June to August survey period. This stands in contrast with bank regulators’ often-stated worries that lending standards were eroding in the face of competition to make loans.

The loan officers told a different story, though, with regard to competition in lending for commercial real estate projects. The survey said 82% of domestic and 67% of foreign banks operating in the U.S., on net, “reported that competing institutions had eased standards or terms” on commercial real estate loans over the last year, the survey said.

The Fed also said 9% of domestic banks, on net, indicated that demand for business loans from larger customers had weakened over the three-month survey period. That was because there were fewer mergers and acquisitions, slower customer investment in plant and equipment and increased lending from non-banks, the survey said.

The loan survey follows repeated warnings from regulators about an erosion in lending standards. The Comptroller of the Currency, the agency that regulates national banks, has been perhaps the most outspoken. “We are seeing increasing evidence that bank internal controls are slipping,” said Julie Williams, the acting Comptroller of the Currency. She blamed the slippage on banks’ complacency created by the industry’s prosperity and cost-cutting.