<font size=4>Banks tighten credit, loan standards </font>

Fed Reserve says institutions doubt ability to repay debts

Jathon Sapsford
THE WALL STREET JOURNAL

Nov. 14 — <font size=4>The Federal Reserve says banks are tightening their lending standards because of doubts about companies’ ability to pay their debts. </font>


THE SURVEY ADDS fuel to growing concerns that an unwillingness among bankers to lend is threatening to choke off investment, hampering chances of a quick economic recovery. Bankers, for their part, have said the deteriorating economic outlook justifies more caution in making loan decisions.
In a quarterly survey of 57 large U.S.-owned banks, 51 percent said they are tightening their criteria for approving commercial and industrial loans to large and middle-size borrowers. That is up from 40 percent during the last survey in August, the Federal Reserve said.

The same survey found that among 22 foreign banks with lending operations in the U.S., 63 percent had tightened their standards during November, up from 50 percent in August. “All survey respondents pointed to a less-favorable or more-uncertain economic outlook as at least a somewhat-important reason for changing their commercial-lending policies,” the survey said. “Moreover, that reason was said to be very important for 63 percent of domestic banks, up significantly from 37 percent in the August survey.”
Behind the tightening standards, which means anything from higher interest rates to stricter covenants, are the declining financial circumstances of borrowers. The economic fallout from the Sept. 11 terrorist attacks has caused joblessness to rise, industrial output to fall and corporate earnings to weaken. As a result, defaults and delinquencies are on the rise, and bankers are writing down more loans.

Almost 30 percent of the surveyed domestic banks, and 40 percent of foreign respondents, said they had written down the value of some loans, particularly to commercial airlines and other travel companies. Regulators and senior banking-industry executives said the tightening standards fall short of a full-scale credit crunch, and noted that credit is available for those companies with the ability to finance their debt.
But those assertions are little comfort for borrowers who are having difficulty. “Many good companies with sound balance sheets are not able to get credit,” said Jerry Jasinowski, president of the National Association of Manufacturers. “We’re not talking about borrowers from troubled areas like dot-coms or telecom companies. We’re taking about perfectly healthy companies.”
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To keep money flowing, the Federal Reserve has lowered interest rates 10 times this year, including a reduction last week in the federal-funds rate to 2 percent from 2.5 percent. That move lowers the cost to banks of raising the money they lend to borrowers. But the survey found that much of that savings isn’t being passed on to borrowers. Of the banks surveyed, 64 percent said that the difference between what they pay for funding and what they charge borrowers for loans, known as the “spread,” is widening, up from 50 percent who reported a widening spread in August. Among foreign-based banks, 64 percent said their spread was widening, up from 60 percent in August.

Wider spreads reflect a fear among bankers that the risks of lending are increasing, and thus they demand to be paid more to cover those risks. Yet the survey also found that as the economy slows, the demand for loans is on the decline, because borrowers require less funding for investment. About 70 percent of domestic banks reported weaker demand for loans from large and medium-size commercial and industrial enterprises, up considerably from about 50 percent in the August survey. Demand for loans from small borrowers also is falling, the survey said.




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