WASHINGTON - Chief economists at nine of the nation's largest banks are not alarmed by recent credit-quality scares at Wachovia Corp. and Unionbancal Corp.
"Credit quality is still excellent," said Carl Tannenbaum, chief economist for LaSalle Bank/ABN Amro of Chicago and chairman of the American Bankers Association's economic advisory committee, which released its semiannual forecast Wednesday. "While we may not be as perfect as we were 12 months ago, the banking industry is still very well reserved, credit standards have been reinforced in some cases, and as long as we can engineer a smooth progression to a soft landing, we aren't expecting major credit events, either in the markets or in the banking system, to undermine the quality of the expansion or the civility of the system," he said.
Regulators and analysts have raised concerns that troubled syndicated loans, which required Wachovia and Unionbancal to raise their reserves, could end the banking industry's eight-year string of record earnings.
The Federal Deposit Insurance Corp. released its quarterly review of regional economic trends Wednesday, including an article titled "Banking Risk in the New Economy." While the so-called new economy may be extending the economic growth cycle, the 22-page report also concludes it may produce a more severe recession. (A copy of the report is available at http://www.fdic.gov/bank/analytical/regional/index.html.)
The ABA's advisory committee based its credit-quality optimism in large part on its prediction that the Federal Reserve Board will successfully engineer a soft landing for the economy. The bankers said they expect the Fed to raise rates a quarter-point next week and 50 basis points later this summer. The committee predicted that the economy will grow 4.1% this year before settling to a more modest rate of 3.3% in 2001.
"As long as inflation remains below the real growth rate of the economy, the credit problems will be manageable as the Fed increases rates," said David L. Littmann, senior vice president and chief economist at Comerica Bank of Detroit.
The chief economists said they expect the prime rate to peak at 10% late this year or early next year and gradually fall back to 9.5% by yearend 2001.
The committee did not recommend banks buttress their reserves.
"We haven't reached the state yet where significant additions to reserves are warranted and where any particular sector is causing us to think about crunching credit," Mr. Tannenbaum said.
Mr. Littmann acknowledged that "credit quality is deteriorating, and we are taking a response that is more restrictive. We are watching our credit more closely, so there is a less willingness to lend."
The situation is slightly different in the South, where SunTrust Banks Inc. of Atlanta has experienced a stable demand for loans, but a decline in the number of applications that make it to closing.
"It's not clear that the apparent slowdown is coming from the bank side. Some of it may well be of a backing down on the demand side for loans," said SunTrust chief economist Gregory L. Miller. "We're finding that customers are now more willing to delay going to closing, and some are simply canceling applications."
The economists peppered their general optimism with calls for caution.
"There is clearly a need for caution and recognition of careful risk evaluation, but it's too early to really become worrisome of credit quality," said Kelly Matthews, chief economist for First Security Corp. in Salt Lake City. "Just be careful."