Magazine article American Banker

Hint of Slower Recovery in Credit Exam?

Magazine article American Banker

Hint of Slower Recovery in Credit Exam?

Article excerpt

Despite the alarming news from J.P. Morgan Chase & Co. last week, federal regulators remain convinced that the industry's bad-loan problem is nearing a peak. It may just take a little longer to get there.

The number of "adversely rated" loans jumped during this year's Shared National Credit review of the largest syndicated credits. But David D. Gibbons, deputy comptroller for credit risk, said the pace was far slower than last year when the volume of troubled loans nearly doubled, to a record $192.8 billion.

Mr. Gibbons would not specify the increase, but other sources said problem credits rose about 50% this year.

Though encouraged that the credit cloud is lifting, Mr. Gibbons cautioned against expecting quality to snap back quickly. "It is getting better, but it is getting better slowly," he said in an interview Monday.

Federal Deposit Insurance Corp. Chairman Don Powell echoed Mr. Gibbons Monday, citing improved underwriting standards and promising reports from Moody's Investors Service of lower bond default rates. The comments reinforce an early-2002 prediction that the credit cycle would turn this year, yet both men said it may take a bit longer for loan problems to crest.

"We are still going to see fairly high levels of commercial and industrial loan defaults through the next two quarters and into early next year," Mr. Gibbons said. "But we should recognize that banks are handling it very well in terms of balance-sheet strength. They are taking this credit cycle much better than they did in the past."

That is because banks have more diverse earnings sources and more capital, he said.

In a speech in Utah sponsored by RMA-the Risk Management Association, Mr. Powell blamed the continued slide in credit quality on a number of factors, including the collapse of many major companies.

"We believe recent record levels of corporate bankruptcy filings may not have fully run their course," he said. …

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