Commercial lending standards at national banks have tightened for the first time since 1993, according to a survey by the Office of the Comptroller of the Currency covering the period from April 1998 to April 1999.

But the industry remains under the watchful eye of regulators who continue to warn that moderate change will not raise overall standards enough to offset four previous years of lax underwriting practices.

Additionally, banks are beginning to pay a price for those years of relaxed corporate loan standards in the form of rising default rates.

In a letter accompanying his agency's annual "Survey of Credit Underwriting Practices," Comptroller of the Currency John D. Hawke Jr. wrote, "While I am encouraged by the findings of this year's survey, I remain concerned about the quantity and quality of credit risk among our banks."

The survey asked examiners-in-charge at the 67 largest national banks, which account for 90% of national bank lending, to asses changes in underwriting standards.

They reported that over the year ending in April, 25% of banks had tightened their standards for commercial loans, while another 13% had eased. This compares to only 4% that reported tightening in the prior 12 months and 44% that reported easing.

Except for home equity lending, where an easing of standards was found, retail loan underwriting continued what is now a three-year tightening trend, as 27% of banks reported higher standards and 21% reported easier ones.

Tempering what they regarded as generally good news, regulators noted in bank loan portfolios across all commercial and retail products are a higher number of loans at risk of default. They said bankers can expect to see default rates rise again next year.

"This battle is far from over," said deputy comptroller David Gibbons. "One year of modest tightening is not going to do it. There is going to have to be some more tightening up and some soul-searching by banks in terms of the kind of risks they want to be booking and the kind of returns they want to be booking them at."

On the commercial side, the most significant tightening occurred in the international area, where 42% of banks tightened their standards and only 4% eased them. Regulators attributed the change to the market shocks caused last year by the combination of Russian defaults, the near-failure of the Long Term Capital Management hedge fund, and the Asian crisis.

In agricultural lending, 18% of banks tightened standards and only 3% eased them.

Commercial borrowers were held to a lower standard in real estate lending, where 23% of banks eased standards versus 17% that tightened; middle market lending, where 18% reported eased standards and 9% tightening; and small-business lending, where 13% eased and 12% tightened them.

Examiners found that 55% of banks faced increased risk of default in their national/syndicated commercial loan portfolios and 45% maintained their previous risk levels. None reduced their risk of default. Other dramatically increased risks of default were identified in the areas of structured financing, as well as agricultural, commercial real estate, and international loans.

In retail lending, banks continued to crack down on consumer leasing, as 41% tightened standards while only 5% eased. Credit card borrowers found tighter standards at 26% of banks and eased standards at only 8%. Indirect consumer credit standards were tightened at 37% of banks and eased at only 7%.

Conventional home equity lending standards eased at 23% of banks and rose at 10%.

Examiners found that areas of retail lending with the greatest increased risk of default were high loan-to-value home equity loans, consumer leasing, and credit cards.

"None of this is a surprise," said Kevin Blakely, executive vice president at Cleveland-based Keycorp and chairman of Robert Morris Associates, the lender trade group. "We know what's going on in our markets because we're out there slugging it out every day."

Dorothy Horvath, executive vice president at National City Bank in Columbus, Ohio, said, "There was nothing surprising here. The study focuses on the areas that are quickest to respond to market conditions."

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