As commercial lenders convene in Boston today for their fall conference, there are growing signs that the industry could be entering another cycle of loose credit standards.
Sponsored by Robert Morris Associates, a Philadelphia-based trade group, the annual gathering of loan officers has focused in recent years on lending fundamentals.
But just as the banking industry has nearly dug itself out of the massive loan problems created in the 1980s, competition to book new assets has heated up, pressuring loan pricing and underwriting standards.
"The biggest issue is whether banks are going to hold the line on credit hygiene," said Christopher Snyder, president of Loan Pricing Corp. in New York, and a close observer of commercial lending practices.
"The evidence so far is not good, and I think it's going to get a lot worse," he added. With too many banks chasing too few good credits, competition is heating up for customers of marginal credit quality, where the repayment of principal is more at risk.
"That's really where the rubber meets the road in terms of bank profitability," said Keith Lawder, senior vice president of Wachovia Bank of Georgia.
At a Crossroads
Mr. Lawder and others agreed that the industry today is at a critical juncture, and it remains to be seen whether memories of the last credit fiasco are fresh enough in lenders' minds to prevent another one.
"This is probably the most important time in the cycle to focus on doing business in a sound, fundamental sort of way," added the Wachovia executive.
Given the sluggish economic recovery, loan demand is likely to remain subdued. As a result, asset growth probably will be modest for the time being, unless banks revert to the sort of reckless lending that characterized the 1980s.
Soft Loan Demand
"There's no question that loan demand has continued to be soft - probably softer than most people would have anticipated," William Pierce, executive vice president and chief risk policy officer at Chemical Banking Corp. in New York. "We are certainly attempting to drill into people in our organization that we don't want to relax lending standards."
Said Kevin Mulvaney, executive vice president and head of national banking at Bank of Boston: "Everyone is remembering the old days and trying to figure out how we can grow and not make stupid mistakes."
In the past, the banking industry's problems often have stemmed from "pushing lending officers for too much volume," said Alexander Spratt, president of Bucks County Bank, part of Independence Bancorp, Perkasie, Pa.
One Extreme to the Other
"What worries me is that bankers jump from being totally closed for business to underwriting in a very loose fashion - it's like a bouncing ball," Mr. Spratt added.
Even a loan of dubious credit quality usually takes some time to go sour, so the verdict on today's credit standards won't be in for a while.
"If we get aggressive now, we won't see the hits for three more years," said Joseph May, advisor to the board of Citizens National Bank in Cheboygan, Mich., and incoming president of RMA.
Mr. May, who until recently was chief credit policy officer at Comerica Inc. in Detroit, said some of the current backsliding in pricing and credit standards is a natural byproduct of soft loan demand and a fairly flat economy.
So far, Mr. May said he doesn't think banks in general have crossed over the line of prudent lending.
But he also acknowledged that history is not on the side of prudence.
"In past cycles, obviously, we have tipped over," Mr. May said. "We have to be concerned that this yet again could repeat itself," he added.