Heeding credit-quality warnings by regulators, bankers are taking steps to protect their portfolios from an economic downturn.

Measures vary from establishing limits on how much rates and terms may be cut to reducing the amount of credit extended to specific industries.

"We are telling our people to use their heads and don't do stupid stuff," said Bill Vandiver, chairman of corporate risk policy at NationsBank Corp. "You have to make sure the decisions you are taking today are reasonable."

The initial efforts are winning praise from regulators, who recently have amplified warnings of slipping credit quality.

"There has been some positive reaction," said Federal Reserve Board Governor Susan M. Phillips. "Some banks are doing a better job at assessing credit risk."

Chief credit officers at large banks said they are jawboning their lenders to hold firm on rates and terms despite fierce competition on both fronts.

"We are trying to keep disciplined and stay on the profitable side of pricing," said Paul McGloin, chief credit policy officer at CoreStates Financial Group. "Unfortunately, you don't always realize whether you are pricing for all the risk."

Holding firm is not easy, said Kevin M. Blakely, executive vice president for risk management at KeyCorp. Some banks and finance companies are willing to cut prices to the bone to generate new business, he said.

"This is becoming a commodity business rather than a relationship business," Mr. Blakely said. "There are banks that just want to collect a fee and blow the deal into the securitization market."

As proof of the industry's excess, Mr. Blakely points to the proliferation of structured loans, which are designed so the repayment plan meets the venture's projected cash flows. Some of these loans do not require a payment for 10 years, he said. "That is truly structured finance," he said. "It is manufacturing a deal to make it work."

Mr. Vandiver said he has told his loan officers to reduce economic growth estimates used to determine a borrowing company's creditworthiness. "Slower growth means sales are slower," he said. "So you have to account for that in projections and pro formas when looking at borrowers."

Besides reviewing how they price and structure loans, banks also are cutting back credit extended to subprime lenders, communications firms, furniture stores, the medical industry, real estate developers, and retailers.

David L. Eyles, chief credit policy officer at Fleet Financial Group, said his institution stopped extending credit to subprime lenders after several encountered financial trouble about a year ago. "We have reduced our (subprime) portfolio between 80% and 85%," he said.

Fleet also has cut back sharply on lending to communications and media firms because competitors were willing to extend maturities to nine years, two years longer than typical. "That is just too long for our appetite," he said. "We have not been participating in those types of transactions."

Other banks are increasing their monitoring of specific industries.

Paul M. Dorfman, executive vice president at Bank of America, warned that many furniture stores make money financing customer purchases. "If the borrowers start to have difficulty, then these companies are going to have difficulty," Mr. Dorfman said.

Mr. Dorfman also said he is increasingly worried about the condition of hospitals and doctors. Because of health maintenance organizations, fewer patients have the option of using out-of-network providers for medical care, he said. That makes loans to hospitals and doctors more risky because they could go broke if they lose an HMO contract.

Commercial real estate also is raising red flags in some markets. Sonny Lyles, senior vice president and chief credit officer at Bank United Texas, said several Texas cities, including Houston, are experiencing booms that may prove unsustainable. "We are warning our loan officers to look for those deals on real estate construction where we cannot compete effectively on price or terms," he said. "We are asking them to be very careful."

Retailers also are under increasing scrutiny.

The large number of pre-Christmas discounting has lenders worried about profit margins at department and specialty stores. "Many of the retail stores-even the moms-and-pops-offered discounts before even Thanksgiving," Mr. Lyles said.

Year-2000 problems also are drawing attention from lenders, who fear borrowers may default if their computer systems crash at the turn of the century.

"You can't talk about credit quality without thinking about the millennium and what sort of effect that will have on small businesses," Mr. Blakely said. "You have to wonder if they have the financial wherewithal to makes themselves millennium-ready."

On the consumer front, bankers said they are far less worried, although they highlighted several areas of concern. Foremost on the list are loans for auto leases, whose rates are based upon the expected resale value of the car. The sudden popularity of leases three years ago means a glut of used cars is about to enter the market, which could cause prices to drop and produce losses for lenders.

Bankers also said they have become more selective in their credit card offerings in a bid to reduce losses. Many also are refusing to offer 125% and 150% loan-to-value home equity loans.

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