Are bankers giving away the future with loans?

As competition intensifies, a growing number of experts warns that banks are sacrificing credit quality for market share.

Some bankers acknowledge that margins are under pressure but argue that it is important to maintain relationships with borrowers, who buy other services from their banks.

'Bankers Never Learn'

But the view that bankers are again putting the industry at risk is gaining some heavyweight followers. John G. Medlin Jr., chairman of Wachovia Corp., is among those expressing concern.

"Bankers never learn," Mr. Medlin said. "Banks are getting paid for their money cost, some of their carrying cost, but not for the credit risk they are taking."

Perhaps nowhere is the convergence of competition, rising rates, and weak credit structures felt more than in business lending.

"The banks are more serious about their competition than I've ever seen them," said Jerry Grant, a corporate finance consultant at KPMG Peat Marwick in Chicago.

"Years ago, they would never compete on credit terms, but today some are."

Borrowers are said to be dictating terms, forcing banks to grant longer maturities and interest rate caps. Moreover, bankers are being pushed into dropping requirements for personal guarantees and collateral or casing up on financial reporting requirements, the critics claim.

An Old Story

Of course, bankers will not admit to such changes in credit policy. But they suggest that, if they are unwilling to work with a borrower, there is always a willing lender across the street.

"It's the old 'everyone drives an ugly car but me' story," said Dev Strischek, senior credit policy officer at Barnett Banks' Palm Beach County unit and incoming president of Robert Morris Associates, a commercial lending trade group.

He admitted that traditional covenants are under pressure but added: "I don't see us having thrown out significant value. The things that protect us are still there."

Mr. Strischek is not alone. Other bankers say the impression may be that credit standards are changing just because banks are trying to be more responsive to customers or risk-losing them. At Shawmut National Corp., one of the first things that chief credit officer John Huston did was disband the loan committee. He says the move was designed to cut the response time from weeks to days and to give more accountability -- and authority -- to officers in the field.

"The emphasis placed on responsiveness by customers means the traditional approach won't do," he said. noting that even he makes customer calls 10 days a month from his Boston office.

While conceding that competitive pressures exist, Mr. Huston said the marginal profitability of some loans can be offset by cross-selling other products, such as 401(k) plans and cash management.

"If the only service a middle-market customer has with a bank is a loan, then it is very likely that you may not make money off that customer," he said.

While some bankers shrug off the situation as a new competitive reality, others see it as history repeating.

"We had ashes and sackcloth in the early 1990s, and we are now wearing lampshades again," said Jim Grant, editor of Grant's Interest Rate Observer and a student of credit cycles. "The elapsed time of repentance [from the last batch of problem loans] seems to be about six weeks."

He added: "There again seems to be too many dollars chasing too few deals. In that market, deals appear to soak up those dollars, and the return of mergers may be a sign of that."

Herd Instinct Seen

To be certain, no one is suggesting that the speculative lending of the 1980s has returned. But observers say old habits did not die in the last loan cycle.

"The old herd instinct is in place," said Campbell Chaney, banking analyst at Dakin Securities Corp., San Francisco. "Before, it was loans in the oil patch, loans for real estate and to Third World countries. This time, it's small-business borrowers."

He said bankers are pressured by the need to grow loans -- and profits -- to satisfy investors today, even if they regret it later.

"The banks are going to shoot themselves in the foot again," said Mr. Chaney, a former bank examiner.

"I'm just not sure of what it will be over. It's a no-win situation for them. If they truly want to price the loans to compensate for risks, then they are not going to be able to make loans today."

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