The nation's major banks, concerned about their own deteriorating finances, are making fewer loans to corporations.
By cutting back on loans that companies use to buy other concerns, build factories and develop products, the lending slowdown weakens the national economy and could precipitate or lengthen a recession that many economists say has already begun.
So far this year, according to Federal Reserve data, existing loans to business by the country's large banks have fallen nearly $5.2 billion, to $315.58 billion -- a significant change of direction from 1989, when loans at banks rose more than $18.4 billion.
Banks have pulled back on lending and laid off employees mainly in response to their own troubles, especially a growing volume of commercial real estate loans that are not being paid back. And federal regulators have encouraged the banks to be tightfisted by pushing them to set aside more funds as a capital cushion against further losses.
Executives and entrepreneurs across the nation are finding that bankers once eager to lend them money are suddenly reluctant.
In general, bankers' fears, according to analysts, are understandable given the mounting losses on loans at many banks and the continued softening of the nation's economy.
Banking regulators have found the industry's losses so worrisome that they are prodding banks to add to their capital, which can be used to cover losses from bad loans. But the industry's troubles are making it increasingly costly for banks to raise new capital because investors are shunning bank stocks and bonds.
"We don't know yet how bad things will become for banks, and that uncertainty is creating a lack of confidence in banks," said Richard L. Pike, banking specialist at Chancellor Capital Management, a New York investment advisory firm.
Accordingly, most banks do not have the option to issue new securities to raise capital these days. Thus, to shore up their capital base, the major banks have typically taken two steps to conserve scarce funds: cut their stock dividends and shrink their business.
Twenty banking companies, including Chase Manhattan Corp. and Chemical Banking Corp., have reduced or eliminated dividend payments to shareholders in the last year. Many banks are also cutting their work forces, led by Chase Manhattan, which expects to eliminate 5,000 jobs by the end of the year.