Despite a weakening of loan standards, federal regulators have found little deterioration in the portfolios at most banks.
The Federal Reserve Board, in an analysis to be sent to examiners, has concluded that banks eased terms and cut rates from 1995 to 1997 to attract customers but that the strong economy kept problems at bay.
"There has been easing of credit terms," said Richard Spillenkothen, the Fed's director of banking supervision and regulation. "But that has been offset to some degree by the continued strong economy, which allows borrowers to continue to service their debt."
He warned, however, that credits could sour quickly if the economy slows.
"It is important that lenders consider not just the current favorable environment but what would happen to these loans in a less favorable environment," he said.
Separately, the Federal Deposit Insurance Corp. said Monday that banks are making increasingly risky commercial, real estate, and home equity loans. Yet the agency said new loans are performing well.
"We don't view these latest early indicators as worrisome signs of great danger," acting FDIC Chairman Andrew C. Hove said. "But they do call for close monitoring."
Bankers said both studies show that the industry has heeded pointed warnings from regulators not to allow credit standards to slip too far.
"Both studies are correct in saying that there has been some loosening of credit standards," said Paul M. Dorfman, executive vice president of Bank of America and chairman of Robert Morris Associates, a trade group for credit officers. "But behavior by lenders is still rational. We are not seeing things that don't make sense."
The Fed compared commercial and real estate development loans made in 1997 and 1995. Its findings, to be released soon in a letter to examiners, were previewed last week at a Federal Reserve Bank of Chicago conference.
During the three years, the spread of loan rates over other interest rates fell by as much as 40 basis points, while average maturities rose by 1.3 years on loans to manufacturers and 1.1 years on loans for residential construction, the Fed said. Also, 40% of heavy manufacturer borrowers won unsecured credits, up from 21% in 1995.
The Fed found that debt service ratios improved slightly, loan covenants were tougher, and guarantors of loans were more likely to have their financial data analyzed by lenders.
Malcolm T. Murray, chief credit officer at First Union Corp., said he does not fault regulators for ringing credit-quality alarms.
"They have been appropriately reminding bank owners and managers that bad loans are made during good times," he said. "They have not been saying all bankers are dumb, missing the mark, or making bad loans."
"This is very positive news for how the industry has managed underwriting standards for the last several years," said James Chessen, chief economist at the American Bankers Association. "The Fed found that banks are looking at underwriting in a very analytical way and managing the process efficiently and effectively."
Former Comptroller of the Currency Eugene A. Ludwig first warned of weak underwriting standards in December 1996. Since then, federal regulators have often chastised banks about credit quality.
