Bank credit crunch may be easing Fed says lenders have relaxed terms XTC

August 28, 1993|By New York Times News Service

WASHINGTON -- In a strong sign that the credit crunch might be easing, banks have become noticeably more willing to lend to businesses, including small companies, the Federal Reserve reported yesterday.

Bank executives surveyed by the Fed said they had relaxed their terms and requirements for a wide variety of loans. Even as standards for commercial real estate loans stayed restrictive, the bank executives reported what the Fed called a "fairly significant net easing" of standards and terms for commercial loans.

About a fifth of the respondents in the August survey eased standards for approving loans for medium and large businesses. And about 12 percent eased standards for small borrowers.

What is more, banks lowered the cost of loans to businesses, according to the Fed's quarterly survey of lending officers at 78 domestic and foreign banks with branches around the country. From 30 percent to 40 percent scaled back the cost of credit lines for medium to large companies; 15 to 20 percent did so for small ones.

Banks' lending to businesses shrank sharply toward the end of the 1980s and has stayed low, a trend that many experts cite as one reason for the sluggish recovery from the recession.

While bankers generally said that they had had little demand for loans in a soft economy, business executives, especially those in New England, contended that credit has been hard to get since tough lending standards took hold after the banking industry's difficulties in the 1980s.

"We've been sitting on the edge of our seats waiting for this to happen, and it's finally happened," Harvey Rosenblum, research director at the Dallas Federal Reserve, said of the survey's findings. "It's an enormous change."

Noting that the survey in May had suggested a change in attitudes was under way, Frank Newman, the Treasury's undersecretary for domestic finance, said, "Having a second quarter confirming a general direction in lending attitudes is important."

Federal Reserve officials attributed the shift in bankers' psychology to changes in the economic and banking environment.

"The economy is on a slow upward track, property values have stabilized and there's more equity available for small businesses to make the hurdles," said Marvin Goodfriend, research director at the Richmond Federal Reserve.

"Also, bank capital positions have improved, and they are no doubt in a better position to take on new loans."

When interest rates were coming down, banks poured billions of dollars into government securities. That has become one catalyst for the attitude shift, Mr. Rosenblum said, because a pending rule will require banks to use market-value accounting for their investment portfolio, forcing them to revalue their assets frequently to reflect changes in the value of bonds.

"It makes the true underlying risk of investing in government securities manifest," Mr. Rosenblum said. "As a result it narrows the perceived risk spread between lending to a small-business customer on the one hand and investing in a 7- to 10-year Treasury note on the other."

The other striking finding in the Fed's bank lending survey was that the White House initiative in March to break the credit crunch, the Credit Availability Program, seems to have had little to do with the shift in lending attitudes and practices.

"The survey responses suggest that the CAP has not had a substantial effect on the supply of credit to small and medium-sized businesses, although many respondents expect it to do so in the future," the Fed reported.

One reason: Just 4 banks out of 48 eligible to participate in the initiative's so-called minimal-documentation loan program have done so thus far.

The apparently tepid response to the overall program came as no surprise to the many analysts who maintained that the weak economy, the fragile capital position of banks and the poor financial condition of many small businesses -- rather than overzealous regulation -- was to blame for the lack of business lending.

But Mr. Newman, who worked with the Federal Reserve last spring to draft the initiative, said: "The great impact of this program is still to come. Some of the important regulatory revisions weren't issued until June. It takes time for bankers to receive them, analyze the changes and put them into effect."

Most banks have not yet gone through a bank examination cycle under the new regimen, he said.

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