Magazine article American Banker

Lenders See Risk of Drop in Standards

Magazine article American Banker

Lenders See Risk of Drop in Standards

Article excerpt

As commercial lenders convene in Boston today for their fall conference, there are growing signs that the industry could be entering another cycle of loose credit standards.

Sponsored by Robert Morris Associates, a Philadelphia-based trade group, the annual gathering of loan officers has focused in recent years on lending fundamentals.

But just as the banking industry has nearly dug itself out of the massive loan problems created in the 1980s, competition to book new assets has heated up, pressuring loan pricing and underwriting standards.

Deterioration Seen

"The biggest issue is whether banks are going to hold the line on credit hygiene," said Christopher Snyder, president of Loan Pricing Corp. in New York, and a close observer of commercial lending practices.

"The evidence so far is not good, and I think it's going to get a lot worse," he added. With too many banks chasing too few good credits, competition is heating up for customers of marginal credit quality, where the repayment of principal is more at risk.

"That's really where the rubber meets the road in terms of bank profitability," said Keith Lawder, senior vice president of Wachovia Bank of Georgia.

At a Crossroads

Mr. Lawder and others agreed that the industry today is at a critical juncture, and it remains to be seen whether memories of the last credit fiasco are fresh enough in lenders' minds to prevent another one.

"This is probably the most important time in the cycle to focus on doing business in a sound, fundamental sort of way," added the Wachovia executive.

Given the sluggish economic recovery, loan demand is likely to remain subdued. As a result, asset growth probably will be modest for the time being, unless banks revert to the sort of reckless lending that characterized the 1980s.

Soft Loan Demand

"There's no question that loan demand has continued to be soft - probably softer than most people would have anticipated," William Pierce, executive vice president and chief risk policy officer at Chemical Banking Corp. …

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