Intensifying competition is making it all but impossible for banks to heed regulators' warnings about deteriorating credit quality, lenders say.
One week after Julie L. Williams, acting comptroller of the currency, ordered examiners to increase their scrutiny of commercial loan underwriting standards, lenders say they are pushing as hard as ever for deals, offering "loose but not inappropriate" terms to borrowers.
It is not that they disagree with Ms. Williams and other regulators who warn that lending standards are slipping. But lenders say they are battling too hard to gain market share and boost their bottom line to tighten their credit standards.
"Leaders of the major banks are looking at the things the regulators are saying, and feel that's what regulators ought to be saying," said Malcolm Murray, chief credit officer at First Union Corp., Charlotte, N.C., and a member of Robert Morris Associates' regulatory council.
But at the same time, "we're seeing more financially driven transactions."
A top syndicated lender said, "Consolidation and competition are driving this market and they will continue to."
Ms. Williams' order was only the latest in a string of warnings from regulators about deteriorating lending standards.
In June the Federal Reserve Board released a supervisory letter warning banks to expect losses in their commercial loan portfolios if the economy deteriorates. Regulators have also issued warnings specifically targeted at syndicated loans and credit card debt.
In the commercial market, some of their concern comes from a rapid rise in leveraged lending-loans made to companies believed to have a higher credit risk.
Because leveraged loans carry higher interest rates, they are more lucrative for lenders than investment-grade loans. They also carry higher underwriting fees.
With $152 billion in leveraged loans underwritten during the first half of this year-compared with only $86 billion during the same period last year-the market is moving at a breakneck pace.
Indeed, bankers say they expect the market to grow.
Investment grade "corporate lending is a commodity," First Union's Mr. Murray said. "It's much more difficult to generate adequate returns from commodity products."
Other bankers and observers suggest that lending standards are unlikely to change soon.
Sean C. Keenan, an loan-bankruptcy analyst with Moody's Investors Service, New York, said that from a credit-rating standpoint, banks are exposed to more risk than they were in the late 1980s. However, loan portfolios today are far more diversified and banks are far more aware of their risk profiles.
"There's a stronger overall sensitivity to the credits," he said. Computer models have helped banks not only examine the loans on their books, but determine whether or not to make loans-the process known as "due diligence."
Mr. Keenan also said banks have to make riskier investments because they operate more like financial services companies and less like the deposit- taking banks of old. Shareholders continue to push for higher returns, not the incremental returns found in safer investments.
"People are saving directly through mutual funds," Mr. Keenan said. "Banks have to be looking at servicing the middle market" with commercial loans.
While lenders say competition is more intense today than it has been in years, they are quick to point out that they are still acting prudently.
"If I were ramming deals through that were using inappropriate credits, I would have been doing it years ago," said James B. Lee, vice chairman and head of global investment banking at Chase Manhattan Corp. "A loan is a credit decision, and that's all it is. I'm a credit guy."
Middle-market lenders say they feel the competitive pressure as well. Dorothy M. Horvath, executive vice president of National City Bank, Columbus, Ohio, said business credits ranging from $50 million to $300 million are being extended with increasingly thin margins and less than ample collateral.
National City's middle market loan officers believe their competition's willingness to offer lower interest rates or looser terms is to blame, she said.
"We keep hearing, 'Woe is me, how can our competition do this when it just doesn't seem appropriate?'" Ms. Horvath said. "Our funding costs are not significantly different than our competitors', so we see some deals that we just can't understand or rationalize."
Ms. Horvath said the recent regulatory warnings are necessary.
"We have not seen any tangible reaction in the marketplace to reverse this trend yet," Ms. Horvath said. "The most common reaction from within our shop is a hope that these warnings will finally curtail some of the excesses we are seeing."
The concerns apply to some consumer businesses too.
Sanwa Bank of California senior vice president Christine D. Larson said some home equity lenders are making these loans with higher than 100% loan- to-value ratios and are not informing borrowers of important tax consequences.
Though the interest on these loans is often tax-deductible, any amount over the value of the collateral is not.
"These tax implications are not being properly disclosed and could come back to haunt the lender later," said Ms. Larson, who is Sanwa's head of retail product management and marketing. "Whether this is subprime or not, that makes for risky lending."