Liability management is the means bankers have used to accommodate the public's desire for long-term loans such as mortgages to the short-term deposits that fund these credits, but economic realities can blunt this tool and prompt a credit squeeze.

Practicing liability management has led to overconfidence. Banks that made lucrative loans have said, "Whatever we have to pay for CDs to fund this loan will be worth it." The reality is that deposits, at any price, tend to dry up in a time of crisis.

Even in a period of mounting fears, banks can gather deposits, but they are being forced to offer highly competitive yields in an effort to overcome investors' fear of default on the lending the deposits support. Many investors have been burned in the stock market and desire both the safety of insured deposits and the yields they formerly earned on vehicles like junk bonds.

Bankers, too, worry about participating in syndicated loans, buying lower quality bonds, or even making some consumer loans they would recently have approved.

As a top officer of a major bank put it to analysts at a recent session, "We are seeing a liquidity shortage that is almost unprecedented. And we cannot see an end to this unless or until the Fed eases credit and the availability of liquidity forces us to relax our standards."

What has happened is clear. After pumping money into every dot-com that came down the pike, the pendulum of public sentiment is now swinging back toward the caution.

More significantly, the banks themselves are declining to make loans that are not of top quality. This, coupled with the Japanese banks' exit from the syndicated market, explains why there are few buyers for syndicated credits. It also explains why bank observers are saying that unless individuals have top credit standing or a home to put up as collateral, they have little chance of getting credit today.

This holds true despite the large number of solicitations bank are sending out for new credit card subscribers. When the filled-out applications come in (and they are far fewer than in the past), the banks are accepting only the top-drawer people.

What we are seeing is a sharp negation of the concept that liability management makes it possible to fund any loan. At the end of the day credit quality and the assurance of repayment mean far more in determining lending policy than the ability to acquire the money to lend in the first place.

Mr. Nadler, an American Banker contributing editor, is professor of finance at Rutgers University Graduate School of Management.

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