Bank Loan Losses Sign of Slowing Economy

Notices of rising loan losses by major banks Wednesday delivered a powerful signal that the economy is slowing, banks are cutting back on credit and small and medium-size companies are facing a tough winter ahead.

Bank of America Corp., the nation’s second-largest banking company, sent a chill through financial markets early Wednesday when it said its loan losses would double in the fourth quarter. The company, based in Charlotte, N.C., said it would write off $870 million in loans because of “further weakness in the economy,” among other reasons.

First Union Corp., also Charlotte-based and the fourth-largest banking company, warned investment analysts that loan losses would increase in 2001.

Bank stocks fell sharply. The reports were the latest in a trend of credit-problem announcements by banking companies, and they join troubles in the high-yield bond market as indicators of broad troubles in high tech and many other industries. Federal Reserve statistics show slight rises in loan write offs and delinquent loans among all banks.

Debt defaults are occurring in furniture manufacturing, health care and hospitals and among small companies in the Internet and telecommunications fields, said economist Mark Zandi of Economy.com, a West Chester, Pa., consulting firm.

Loan losses in high tech will lead to cutbacks in investment in computing, communications and Internet networking equipment. Such investment has been a driving force in the whole economy. “The new economy’s success has been based on free-flowing and cheap capital” as well as on technological change, Zandi said.

But now those capital flows are drying up as financing through high-yield bonds has become prohibitive at interest rates of 14%. Public stock offerings have become much more difficult for small companies. And most large and medium-size commercial banks have said recently that they are tightening their loan standards. “It’s not a credit crunch,” Zandi said, “but the credit spigot, which was wide open last summer, is now half closed.”

The winter will be hard on small to medium-size companies, suggested David Littman, chief economist of Comerica Inc., the Detroit-based banking company that is acquiring Inglewood-based Imperial Bank. “We’re seeing the fallout from the Federal Reserve tightening of credit in this year’s first half,” Littman said.

Businesses will need banks to renew their loans and stay with them this winter, Littman said.

Still, “the worst is over,” Littman suggested. He foresaw the Fed lowering interest rates in next year’s second quarter.

However, the Fed gave no indication of easing credit on Wednesday as its Open Market Committee kept interest rates unchanged while warning of a continued danger of inflation.

Southern California’s economy, with its thousands of small to medium-size companies, will be affected by a general cutback on credit, even though the loan losses reported by Bank of America and others occurred in large syndicated loans.

Syndicated loans are those on which wary lenders spread their risk by allocating shares of the loan to other banks. In good times, banks everywhere welcome participation in them because they are a low-cost way to make extra interest income.

But in a slowing economy, as borrowers miss interest payments, such loans are the first to go sour. Then loan losses, warnings from bank regulators and severe reactions from stock market investors cause banks to get conservative about lending.

That has been happening in California markets, said George Williamson, president of the California Economic Development Lending Initiative, a multi-bank community development lending corporation.

“There’s a tremendous amount of jawboning about credit quality and preparing for the next downturn,” he said. “The market’s going to change a lot in the next year or two.”

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Times staff writer Lee Romney contributed to this story.

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Credit Warning

Bank stocks took a beating as investors saw rising loan losses signaling a slower economy and credit troubles for companies in many industries.

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Ticker Wednesday Percent Bank symbol close Change change Bank of America BAC $42.00 -$3.88 -8.45% Wells Fargo WFC 44.75 -1.88 -4.02 First Union FTU 26.81 -0.63 -2.28 Bank One ONE 34.75 -1.81 -4.96 Comerica CMA 50.44 -0.94 -1.82 Wachovia WB 49.94 -3.16 -5.89 US Bancorp USB 23.06 -0.44 -1.86 Chase Manhattan CMB 40.75 -1.81 -4.26 PHlX/KBW BKX 818.13 -26.15 -3.10 Bank Index

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Source: Bloomberg News