Comptroller of the Currency Eugene A. Ludwig issued a stern warning to commercial lenders on Tuesday, saying the cheap pricing and loose conditions of some syndicated loans is exposing banks to undue risk.

"Underwriting standards continue to erode and have eroded to a point where there is not much farther they can go and remain prudent," Mr. Ludwig told a gathering of bankers here.

He said the risks are particularly great for "downstream participants" - banks that buy up pieces of large loans from other, typically bigger, lenders.

Mr. Ludwig's remarks came as a dash of cold water for syndicated lenders as they wrap up a banner year. Syndicated loans - credits of more than $50 million that originators carve up and sell to other banks - are expected to total $1 trillion this year, stoked by a boom in corporate mergers.

"This is a wake-up call," said Allen W. Sanborn, president of Robert Morris Associates, an association of commercial lenders that hosted Mr. Ludwig's speech. "There's lots of money chasing deals, and people who are making quick decisions are running the risk of making bad decisions."

"Clearly, there's so much competition in the market that pricing and terms have eroded," added Glenn N. Marchak, head of syndications at Natwest Markets, New York.

Loan syndications have taken off largely in response to the deep loan losses of the late 1980s and early 1990s. Banks, reeling from sizable losses on loans for commercial real estate and credits to less-developed countries, became reluctant to hold more than $20 million of any given credit in their portfolios. Syndicated lending has grown 300% since 1990.

Now Mr. Ludwig is raising concerns that the lenders, dazzled by demand for their services, may be losing sight of the very risks they were trying to avoid when they created syndications in the first place.

"What we are seeing in the syndicated loan market today reflects the fact that there is more demand for high-yield paper than there is a supply of investment-quality transactions," Mr. Ludwig said. "We are also seeing, in some cases, investors willing to accept inferior standards simply to stay in the market."

Bankers agreed that lenders have been lulled by a strong economy and the big profits being posted by corporate borrowers.

"There's much more focus on managing exposure and on return than on credit issues," said Katherine Pattison, senior managing director of loan syndications at BankAmerica Corp.

To counter this "disturbing trend," Mr. Ludwig recommended seven steps to avoid unnecessary exposure to the risks posed by syndications.

Generally, senior management should ensure that systems are in place to track and scrutinize the number of exceptions employees make to underwriting standards, he said.

Before participating in a syndication, bank managers should independently analyze the risks and give credit specialists the power to override market officers' decisions, Mr. Ludwig said. Credit officers also should have a strategy in place for backing out of a participation.

Banks should not enter deals if they don't have enough time to do a thorough credit analysis, according to the comptroller.

Finally, Mr. Ludwig said banks' portfolios should be periodically stress-tested to gauge the impact a change in the economy would have on syndicated loans.

The OCC has been concerned about loan syndications for months.

In a survey of 82 national banks released in September, the agency found that 30% of the largest institutions eased their lending standards in syndicated credits during the 12 months ending May 1996.

But since then, examiners have reported further slippage in these standards, which is what prompted Mr. Ludwig to issue Tuesday's warning.

"We have seen transactions in last 90 to 180 days where the underwriting criteria were dicey," Scott Calhoun, the OCC's deputy comptroller for risk evaluation, told a risk management conference in New Orleans Tuesday.

While clearly concerned, Mr. Ludwig said he thinks his agency is ahead of the problem. By using risk-based exams, the OCC detected the deterioration in loan underwriting before it resulted in any serious losses, Mr. Ludwig.

"With supervision by risk, we can spot trouble areas before they boil into real dangers to institutions and the industry," he said.

Daniel Dunaief contributed to this report.

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