During many hotel stays over the past year, while traveling the country in my role as president of Robert Morris Associates, I became a late-night TV talk show fan. David Letterman's Top 10 lists inspired me to create my own "Top 10 Expectations in Credit."

Here is my commercial lending hit parade for the coming year:

No. 10: Commercial banks' market share will continue to erode.

Since I began my banking career more than 25 years ago, commercial banks' share of commercial and industrial loan activity has shrunk from nearly 80% to less than 40%. I expect this phenomenon to continue due to heavy competition from nonbank banks, historically high spreads in net interest margins, and U.S. banks' inefficiencies in delivering products and services to their customers.

No. 9: Asset-based lending by commercial banks will continue to grow.

A word of caution is necessary here, because banks traditionally need to keep loan losses below 34 basis points in order to perform satisfactorily. On the other hand, asset-based lending traditionally has been handled by commercial finance. More significant is the fact that commercial finance companies police these transactions more stringently than banks do; they also price both the servicing cost and the added risk.

No. 8: There will be a politically correct (and politically appropriate) effort to expand investment in small business.

This is also a smart economic maneuver. The fact that the unemployment rate has remained relatively stable despite heavy layoffs by major corporations indicates that the permanent staffing reduction at major companies is being offset by the growth of small business. To take advantage of this economic shift, U.S. banks must be able to more effectively screen opportunities and significantly reduce their costs.

No. 7: In the near future, credit-scoring software for small commercial transactions will be available, allowing banks to service small business loans prudently and efficiently.

This move will parallel the consumer credit scoring modules that have been actively used by banks in the last decade. Although an empirical model has yet to be developed, several banks already have begun experimenting with the utilization of judgmental score cards to streamline costs. RMA is joining in this effort.

No. 6: More small business loans will be securitized with the successful development of the small business credit card scoreboard.

No. 5: Regulation will continue to expand.

The change in administration combined with corresponding changes within the regulatory agency hierarchy and unfinished business will lead to more regulation. This will continue to place commercial banks at a disadvantage with the nonbank banks.

No. 4: Management information systems will improve, as demonstrated by IBM's shift away from the mainframe towards the PC environment.

Technological strides in hardware and software will benefit the banking industry in years to come. Ironically, smaller banks should be able to capitalize on this more easily than the larger banks.

No. 3: There will be a slowed, but continued, growth of derivatives.

Recent events, such as the $157 million expense incurred by Procter & Gamble, have demonstrated that the market has shifted from derivatives to support underlying transactions, to one that includes a large number of speculators; these speculators add significantly to the risk.

No. 2: There will be continued growth in mergers and acquisitions.

This will be driven not only by the economics of too may banks but also by concentrations due to banks' territorial limitations. In essence, we are landlocked within our own states. The other major driving force is economies of scale. Currently the U.S. has 11,000 financial institutions doing the same things that seven Canadian banks, 200 Japanese, and 200 German banks do.

No. 1: Banks' underwriting criteria will continue to slide.

As the president of RMA and a representative of the credit community, I find this to be particularly disturbing. Yet, history shows an inability by our industry to learn from the lessons of the past. Therefore, we probably will continue to be too aggressive in underwriting small businesses and in chasing derivative products.

Keep in mind that because commercial loans take a couple of years to mature, our industry won't feel excesses until 1996 or 1997. Therefore, only those of us who focus on the fundamentals of credit will be able to maintain steady and high-quality performance.

Mr. May is president of Robert Morris Associates, the professional society of commercial lenders, and executive vice president of Whitney National Bank, New Orleans.

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