Fed Finds More Banks Tightening Loan Rules

U.S. banks continued to tighten lending standards as the economy softened in the last three months, deepening concerns that more businesses and consumers will find themselves unable to secure loans.

The bank loan data, reported in a Federal Reserve survey issued Monday, raise the specter of a more serious credit crunch that could have dire effects on the economy.

A credit squeeze could hit hard in California, where many small and mid-sized companies depend on bank loans to finance their operations and expand their businesses.

Almost 60% of domestic banks, and an even higher percentage of foreign banks’ U.S. offices, said they have adopted stricter lending policies for commercial and industrial loans to large and mid-sized companies, according to the Fed’s January survey of senior bank loan officers.

About 45% of banks said they have tightened standards for smaller companies, according to the survey. Many banks also were more strict with commercial real estate loans and some consumer loans.

The survey’s timing suggests that many banks’ credit fears may not have been alleviated by the Fed’s surprise half-point interest rate cut Jan. 3. The Fed cut its key rate another half a point last week.

“It’s a definite cause of concern,” said Glenn Yago, director of capital studies at the Milken Institute in Santa Monica. “We have to be careful not to go into a period [like the one] that precipitated the recession of the early ‘90s, which was clearly credit crunch-driven.”

Most economists agree that credit conditions are looser today than they were a decade ago, when banks slashed their lending dramatically amid steep losses caused by soured real estate and other loans.

But experts worry that the financing environment for some companies is worsening almost daily. The market for initial public offerings of stocks has dried up with the plunge of Nasdaq last year, and venture capital firms also have turned much more cautious about investing in new businesses, recent data show.

The situation is more acute in California than in many other regions, Yago said. California companies already are struggling through the state’s energy crisis. California also is home to a large number of small and mid-sized businesses that rely heavily on bank loans, he said.

Some economists, however, say the bank credit clampdown is not yet damaging the economy.

“The squeeze hasn’t been as pervasive as the [early] 1990s,” said Gary Schlossberg, economist at Wells Capital Management. “More banks are pulling their horns in, but they’re not pulling them in as aggressively.”

What’s more, many borrowers so far haven’t been deterred, the Fed survey said: About two-thirds of potential business borrowers went ahead with their loans in recent months despite stricter loan standards that may have raised costs, bank lending officers said.

Of customers that did not borrow as much as they had planned, more than half financed their spending by borrowing from another source or by using their own internal funds, according to the Fed’s study, which surveyed loan officers at 57 large domestic banks and at 24 U.S. branches of foreign banks.

Still, many companies are beginning to feel the pinch.

One growing San Diego health- care firm with $7 million in annual revenue, for example, was recently told to shop for another bank after reporting a relatively minor $50,000 loss, said George Williamson, head of the California Economic Development Lending Initiative (CEDLI), which has funded some of the company’s debt.

The loss was little more than an accounting adjustment--the company took the income off its books pending payment on already finalized sales. But the lender jumped at the opportunity to bow out, Williamson said.

“What it shows is the bank had already made a determination to look through its whole portfolio, find the weaker credits . . . and seek to eliminate them now, before they become a problem,” said Williamson, who is helping the company look for a new senior lender.

Banks also are changing the types of loans they are willing to make, he said, offering annual lines of credit backed by accounts receivable but shying away from longer-term commitments. That means companies must rely on equity to finance acquisition of inventory, new equipment purchases or expansions.

CEDLI’s lending activity nearly doubled in the last six months alone. Michael Banner, executive director of the Los Angeles Local Development Corp., said he is also preparing for an uptick. “If the deals can’t find a home, that’s when our phone starts ringing,” he said.

Companies often react to tighter bank credit by turning to alternative financing sources such as asset-based lenders. But signs are emerging that even these finance companies are becoming more selective.

Mark Brutzkus, an Encino attorney who represents firms in the Southern California apparel industry, said a recent wave of consolidation among factoring companies--financiers that purchase accounts receivable--has left many small garment makers without a dependable source of working capital.

Brutzkus said large factors such as CIT Group Inc. that have gobbled up competitors have shown a reluctance to continue financing some small apparel firms with marginal clients.

“It has become a big problem for some of these little guys,” said Brutzkus, partner in Ezra Brutzkus Gubner. “They are really getting squeezed.”

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Times staff writer Marla Dickerson contributed to this report.