Banks Raising Loan Criteria, Study Says By John M. Berry Washington Post Staff Writer Saturday, May 11, 2002; Page E01
Even though the U.S. economy is growing again following last year's recession, some banks are continuing to tighten standards for most business and consumer loans, according to a Federal Reserve survey released yesterday. About one-quarter of the large financial institutions surveyed reported increasing interest rates, raising collateral requirements or taking other steps to make commercial and industrial loans to large and medium-size businesses more costly. That was about half as many as said they did so in the previous report, which was released in February. Roughly one-third of the institutions said demand for commercial and industrial loans continued to fall but not as rapidly as late last year. Demand for such loans turned down in the first half of 2000. About 20 percent of the large banks also said they had continued to tighten standards on consumer loans, little changed from the previous report. On the other hand, terms for unpaid credit card balances were tightened at only about 10 percent of the banks, the report said. Demand for both types of consumer credit was reported as stable. In response to a special question about lines of credit established by many firms to back up their commercial paper -- essentially a short-term unsecured promissory note issued by a company to raise cash -- almost all the U.S. banks providing such backup lines said they had increased their fees and raised rates in the past 12 months. "Virtually all of the banks pointed to heightened concerns about possible deterioration in issuers credit quality and a higher probability of lines being drawn because of less certain conditions in the commercial paper market as reasons for tightening standards and terms," the Fed report said. Because commercial paper is not secured, a loss of confidence in the creditworthiness of an issuing firm can mean the company is unable to issue new commercial paper to repay owners of a maturing issue. The backup lines of credit are intended to allow the firm to replace the commercial paper with a bank loan. In response to a second special question, the banks indicated that the lack of available terrorist insurance had not had a major impact on their loans secured by "high profile" or "heavy traffic" commercial real estate properties. "Almost three-quarters of domestic banks indicated that they require terrorism insurance on less than 10 percent of loans financing high profile or heavy traffic commercial real estate properties. Indeed, in their comments, a number of banks noted that their standard commercial real estate loan contracts -- especially for smaller loans (less than $10 million) -- generally do not require terrorism insurance," the report said. "However, six domestic and six foreign respondents that answered these special questions reported that they require insurance against terrorism on more than 90 percent of loans financing such properties. As of the end of [March] these six domestic banks accounted for about 8 percent of all commercial real estate loans in the United States, while the six foreign institutions accounted for less than 2 percent of all commercial real estate loans," it continued. Meanwhile, 30 percent of the banks continued to tighten their standards on commercial real estate loans, down from 46 percent in the last report. A similar share of the institutions said demand for such loans was falling, but again not as many as in the last report.
