43% of Smaller Banks in West Say Exams Keep Credit Tight

LOS ANGELES - In a survey indicating the lingering effects of tough regulatory examinations, 43% of independent bank chief executives in the West said they were rejecting loan applications even from creditworthy borrowers.

The bankers in nine western states said the tight credit policies were a response to their examinations, according to the survey by the Western Independent Bankers Association and the Secura Group, a Washington-based consulting firm.

The percentage reporting such rejections is up from 29% a year ago.

Nine of 10 respondents represented banks with less than $500 million. The regulatory question was answered only by those that had been visited by examiners in the past year.

The survey was taken in October at about the same time the Federal Reserve Board was coming up with a contrasting conclusion in its most recent survey of bank lending officers.

Released Nov. 13, the Fed data showed most banks were no longer tightening credit standards. But borrowing costs were continuing to rise, which could have the effect of keeping credit tight.

Economists and consultants said the recession has more recently hit the West. Therefore, western bankers are still tightening standards while those in other parts of the country are beginning to ease.

The Western Independent Bankers survey "reflects the magnitude of what is going on in California," said Jack Kyser, an economist with the Los Angeles Economic Development Council.

Cultural Difference?

Others suggested that the relatively small banks surveyed by the group may not have been in close touch with political and jawboning efforts to relax examination standards and stimulate the economy.

"It is really easy for a big bank to get the word from the Fed," said Scott Burford, president of Burford Capital, a Los Angeles investment banking firm that caters to smaller banks. "It takes longer for [the message] to trickle down to the smaller banks."

"The results are interesting, but the questions are not directly comparable to ours, so it is difficult to draw conclusions about the differences," said Thomas Brady, a Federal Reserve staff economist in Washington.

The Western Independent Bankers found consumer lending least affected by the current climate. Only 16% of the banks reported "much more stringent" consumer standards.

Toughest on Real Estate

Not surprisingly, real estate construction was the most affected, with 58% of the banks saying they are being much more stringent or not granting any new credits at all.

Stark regional patterns appeared. In northern and central California, 56% of the bankers said they had denied loans because of the regulatory climate. Only 25% of bankers in the relatively robust Pacific Northwest bankers said they had.

Although business people might not like the independent banking group's findings, the bankers are not alarmed. The survey showed 65% of the bankers feel the examination climate is appropriate for current economic conditions. But that is down from 75% last year.

The number of bankers complaining that examiners make new policy during an exam hit 47%, compared with only 22% in the 1990 survey. And 63% of the bankers believe they have no way to appeal unfair decisions within the regulatory framework.

A more-accessible appeals process was one of the measures instituted by the Bush administration to encourage looser credit.

In another unusual finding, 15% of the bankers said their most recent examination led them to consider the merger or sale of their bank. And 8% had a director resign as a result of concerns over personal liability.

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