Southland Banks See Few Signs of a ‘Credit Crunch’

Despite widespread talk of a “credit crunch,” Southern California bankers say general loan demand remains strong--and the banks insist they are eager to accommodate that demand.

Businesses of all sizes are still borrowing money to expand, and competition to make loans is actually increasing in some areas. Most bankers say their credit standards haven’t changed significantly in recent weeks, despite mixed messages from federal regulators about how much risk banks should be taking.

“People are worried about a recession, but we haven’t seen signs of it happening,” said Peter Lowe, chief financial officer for GBC Bancorp, the Los Angeles-based parent of General Bank, which has $1.6 billion in assets. “In the context of what we’ve been seeing, there really hasn’t been a significant disruption in lending.”

Worries that market turmoil might lead banks to cut back on credit helped prompt the Federal Reserve Board to cut short-term interest rates last week for the second time in a month. Central bankers also expressed concern that businesses would drastically scale back expansions, anticipating an economic slowdown. The combination of tighter credit and business cutbacks could strangle economic growth, leading to a recession.

Indeed, some lenders have cut back. Commercial real estate lenders have tightened their underwriting standards, requiring larger down payments on some projects based on fears that a recession could wound developers’ ability to pay back their loans.

General business lending, however, appears unaffected so far. In fact, competition for loans is increasing in some areas, particularly small-business lending.

Jerry Knotts, manager of financial services for the California Manufacturing Technology Center in Ventura, said he has little problem uniting small businesses with lenders.

“I’m having banks come to me looking for deals, which is new,” said Knotts, who helps entrepreneurs write business plans and find financing. “They [the banks] will stretch to help these guys out.”

Competition for smaller loans has heated up as regional powerhouses Bank of America and Wells Fargo vie with smaller community banks for business.

“We are expecting and asking of our managers an increase in [lending to] small and middle-sized business, which shows you where our heads are in terms of expansion,” said Liam McGee, Los Angeles-based president of Bank of America’s Southern California region.

Cutbacks in industries affected by overseas troubles, including entertainment and technology, have slowed down loan growth at Beverly Hills-based City National Bank from its previous breakneck pace of 25% for the year ended Sept. 30, said Chief Operating Officer George H. Benter Jr.

But the bank, which has $2.3 billion in commercial loans outstanding, is still benefiting from a strong California economy as well as market turmoil. Businesses that might once have raised money through stock offerings, for example, are now turning to banks, Benter said.

“When other sources [of credit] go away, banks are the ones left standing,” Benter said.

Competition for larger loans is also keen, bankers said. Mergers have reduced the number of big corporate clients but at the same time expanded the survivors’ need for credit.

“With those consolidations, the size of the loan grows,” said Paul Watson, Wells Fargo vice chairman in charge of corporate and commercial banking. “The needs are huge.”

Bankers and economists say a strong economy, buoyed by low unemployment and low inflation, has helped keep business loan demand high.

California also has not been as buffeted by waves of cheap imports as some economists had feared in the wake of Asian and Latin American turmoil. Banking crises overseas have kept many foreign companies from finding financing that would allow them to flood American markets, said Robert T. Parry, president of the Federal Reserve Bank of San Francisco.

But Parry and other economists warn that foreign troubles could still slow business in the U.S., and some regulators remain worried that banks may not be adequately prepared for an economic downturn.

Before fears of a credit crunch took center stage, a panoply of federal regulators, including the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency and the Fed, had complained that banks were making too many risky commercial real estate loans and that many lenders weren’t projecting how loan portfolios would perform if a recession hit.

That criticism has been muted in recent weeks by fears that lenders would go too far in the opposite direction and cut off credit. But OCC acting director Julie L. Williams said as recently as last week that she is still more concerned about lax lending standards than a general credit shutdown. Williams pointed to bank loans to cratered hedge funds such as Long-Term Capital Management as a sign that lending standards had degenerated too far.

How banks would fare in a recession depends on how well they predict their risk--and how long their loan terms are, bankers and regulators said. Shorter loans, for example, can be renegotiated more quickly to reflect a changing economy.

Corporate mergers that create opportunities for huge loans can also concentrate a bank’s risk, making credit management even more important, Wells’ Watson said.

And while banks have been loath to admit changing their lending standards in recent weeks, several bankers said their business has actually improved as lenders that had been taking too much risk either tightened their underwriting or dropped out of the market.

“I think it’s healthy,” Watson said. “What’s happening is bringing some rational approaches to the debt markets.”

Tom Kramer, chief credit officer for Foothill Independent Bank in Glendale, said his bank’s tight lending standards cost it business in recent years as other lenders relaxed their standards.

While Kramer said the bank is now losing fewer deals, competition for loans is still stiff enough that the $460-million bank is lending out only 71% of its deposits, compared with the 80% he usually prefers.

“The more loans I have outstanding, the better I like it--but good loans are hard to find,” Kramer said.