WASHINGTON - Bank lending to securities brokers and dealers was unusually strong in the final two months of 1999, due in part to a dramatic increase in margin lending by securities firms that has drawn the attention of regulators.
A report issued by the Federal Reserve Board on Tuesday found that institutional lenders, such as insurance companies, pulled out of the market, which drove up the securities industry's cost of borrowing in the commercial paper market in November and December.
As a result, the industry was forced to rely more on banks for credit. The Fed said most of these loans took the form of reverse repurchase agreements, in which the borrower gives securities to the lender in exchange for cash, with the promise to buy them back on a specified date and at a set price.
Observers said that the industry's need for funding arose in part because of an increase in the amount of credit it extends to customers in the form of margin loans. Funds loaned on margin by New York Stock Exchange member firms grew to $229 billion in December, from $182 billion two months before.
Federal Reserve Board Chairman Alan Greenspan noted the increase in testimony before Congress last month, acknowledging that Fed officials and securities regulators were concerned about the increase.
Securities firms also needed to have cash on hand in case customers decided to liquidate their investments in advance of the year-2000 date change.
The Fed report, which surveyed senior loan officers at 55 large domestic banks and 21 U.S. branches of foreign banks, also found that delinquency rates on commercial and industrial loans are on the rise. Among domestic banks, 60% of respondents reported an increase in commercial and industrial delinquencies, while 90% of foreign respondents noted an increase.
Some respondents attributed the increase to industry-specific problems, such as bad health-care loans. Others told the Fed that loans made between 1994 and 1998, when underwriting standards were more lax than today, are beginning to go bad at higher rates. Still other bankers viewed the increase as a movement back toward normal levels, following several years of unusually low delinquency rates.
In response to the increasing level of bad loans, 11% of domestic banks and 29% of foreign banks reported that they had tightened their underwriting standards for commercial and industrial loans to large and middle-market firms. In particular, respondents said that they had had increased risk premiums. That is, they raised interest rates and fees, or otherwise tightened terms, on riskier loans.
Allen W. Sanborn, president of the lender trade group Robert Morris Associates, said that frequent warnings by bank regulators about deteriorating credit quality have contributed to the tightening of underwriting standards.
"The Senior Loan Officer Opinion Survey on Bank Lending Practices" is conducted four to six times a year. In addition to asking about underwriting standards and loan demand, the survey often contains questions on issues of current interest such as lending to securities firms.