Magazine article American Banker

Fed and FDIC Find Banks Hold Line on Credit Quality

Magazine article American Banker

Fed and FDIC Find Banks Hold Line on Credit Quality

Article excerpt

Despite double-digit loan growth in the first half, two government reports show bank credit quality remains strong.

Industry observers attributed the paradox to intense jawboning from regulators, the strength of economy, and nightmares from the last recession.

"Bankers' memories are not that short," said James D. McLaughlin, director of regulatory affairs at the American Bankers Association. "They remember what happened a few years ago. As a result, they are looking at credit quality and listening to the regulators' cautions."

Comptroller of the Currency Eugene A. Ludwig, Federal Reserve Chairman Alan Greenspan, and FDIC Chairman Ricki Helfer all have warned bankers against lowering credit standards.

In a report released Wednesday, the Fed said "no deteriorations in credit quality are noted," even though commercial credit demand has continued to bloom nationwide.

The Fed's findings, contained in the Beige Book, a periodic review of the nation's economic conditions, follow a report Tuesday by the Federal Deposit Insurance Corp. The FDIC said total bank lending increased 12.5% to $2.5 trillion in the second quarter. Loans grew 12.1% in the first quarter.

The FDIC also noted a continued decline in troubled assets at banks, which have fallen to 0.94% of total assets from 1.27% a year ago and 3.24% four years ago.

Bert Ely, president of the industry consulting firm Ely & Co., said the falling interest rate environment also helped.

Lower rates reduced monthly interest costs, making it easier for borrowers to qualify for loans. "People have a better ratio of income to debt, so they look better from a credit quality standpoint," he said.

The economy also continues to grow, ensuring that borrowers keep their jobs and are able to pay their debts, said Karen Shaw-Petrou, president of the industry consulting firm ISD/Shaw Inc. …

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