Choking Off Recovery

October 06, 1991

There is nothing illusory about a credit crunch in metropolitan Baltimore. It exists and is presently a drag on the region's economy. Banks have tightened borrowing standards even as businesses struggle with depressed sales and profits. The predictable result for many smaller concerns is less working capital. For those already skating on thin ice -- bankruptcy.

The Bush administration, operating on the assumption that overzealous regulators have discouraged bankers from making

loans, is tinkering with capital rules and asking business for suggestions in easing the credit crunch. One such idea is a proposal by the National Association of Home Builders to reclassify loans to builders for new home construction as mortgages -- which are deemed less risky than commercial loans. This favored status would kick in once a buyer has signed a contract and made a down payment.

Camouflage of this sort may raise comfort levels, but commercial lending under another name is still commercial lending. What's really behind the credit crunch has little to do with where a loan sits on the books. As noted by Treasury Secretary Nicholas F. Brady, many bankers "now want to do right because they did wrong before. They made a lot of chancy loans and are now trying to fatten up their balance sheets." That certainly applies to banks in the Baltimore Washington area that poured money into risky ventures now sitting empty in the suburbs.

Today, many of those same banks are gun-shy about making commercial loans of any kind. The latest news from the Federal Reserve Board's monthly "beige report" bears this out. Banks reported tighter credit standards for commercial loans and softened demand. Lenders can hardly be blamed for taking a second and third look at business loans. Most are backed by real estate which, of late, has depreciated in value. Getting stuck with a bum loan, even a non-real estate loan, costs the bank money.

There's some anecdotal evidence that banks that lent aggressively during the '80s now are leaning too far in the other direction. The trick is establishing a balance. That there is serious discussion going on in Washington about solutions to the credit crunch is a promising sign. The real answer, however, lies in the lending policies of each individual bank. The real estate slump served notice on many that their lending rules needed tightening. That tightening now shows signs of choking off economic recovery. Perhaps it's time for another review.

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