Paris, Friday, September 22, 2000 As U.S. Economy Surges, Banks Make Riskier Loans
By Kathleen Day Washington Post Service
WASHINGTON - Troubled loans to U.S. businesses have more than doubled in two years, to $100 billion, despite the robust economy. This has raised concern that banks are using lax credit standards to compete for market share, according to banking regulators. At the same time, consumer-lending standards have fallen in some key areas, particularly home-equity loans, the U.S. Office of the Comptroller of the Currency said Wednesday in an annual report on banks' lending practices.
The percentage of consumer debt now held in home and home-equity loans is at its highest level since 1995, the agency said.
The combination of these trends has regulators worried that if the economy falters, banks will be unprepared for the losses they could face.
Bank regulators used the release of the survey to criticize what they say is an environment that forces banks to focus on quarterly profit increases rather than on long-term stability.
In the present competitive banking world, financial institutions' willingness to make more risky loans reflects their emphasis on bringing in more business to meet Wall Street's earnings expectations, banking regulators say.
''Earnings pressure is a major issue in banking,'' said David Gibbons, head of the credit-risk division of the OCC, which regulates nationally chartered banks. ''I just don't think it's fair to expect banks to perform like dot-coms.''
The $100 billion in troubled business loans makes up 5.1 percent of the commercial loans surveyed, which were limited to loans of $20 million or more made by three or more banks, also known as syndicated loans. The new numbers are up from $45 billion, or 2.5 percent, in 1998. Though that is far below the 15.9 percent in troubled commercial loans found in 1991, when bank loan losses were at their highest level in recent memory, regulators say the current trends are worrisome.
Banks are better capitalized than they have ever been, giving them a large cash cushion to absorb possible losses, regulators say. But in the past several years, as the economic boom has continued, they have already found and made the best and safest loans, according to economists.
So now they are having to move into riskier territory to keep their loan business growing.
''If the economy slows down abruptly,'' said Robert Litan, director of economic studies at the Brookings Institution, a Washington research organization, ''we could see a much sharper increase in troubled loans because so many borrowers appear to be overextended.''