Steve Quayle News Alerts

October 8, 2002

WASHINGTON — In a sign of accumulated shocks to the U.S. economy, large business loans in trouble held by U.S. banks in 2002 grew 34 percent from the previous year to $236.1 billion, banking regulators said Tuesday.

Big credits in trouble grew because of problems in the telecommunications sector, alleged corporate fraud, weakness from the U.S. economic recession, and repercussions from the Sept. 11 attacks, regulators said in an annual review of loans of over $20 million shared by three or more banks.

A record $19.6 billion in credits were classified as losses, up 145 percent from the previous year's losses of $8 billion, regulators said.

Of those losses, 39 percent were associated with the stumbling telecommunications and cable industries. Those sectors contributed 75 percent of the increase in adversely affected loans, regulators added.

At the same time, adversely rated big loans grew at a slower pace than in 2001, when they surged by 86 percent, regulators said in their annual review.

The Shared National Credit Review of syndicated bank loans is issued annually by the Federal Reserve Board, the Federal Deposit Insurance Corp., and the Office of the Comptroller of the Currency. The review is based on bank data during May and June and in some cases the first quarter of 2002, an OCC official said.

The increase in troubled loans is a hangover from days of easier credit during the economic boom of the 1990s, but doesn't indicate banks are in trouble, analysts said.

"You should expect credit defaults on lower-rated credits to go up in and around a recession," said William Dawson, chief fixed income investment officer at Federated Investors.

Banks are much better diversified than in past recessions and have spread risks by splitting loans with other banks or by packaging loans to sell as securities to investors, meaning bank failures are less likely, analysts and regulators said.

"It's evidence of a much more robust financial system than it used to be," said Christopher Low, chief economist for FTN Financial.

But while banks still have plenty of credit available, they may be tightening lending standards for some businesses and consumers as losses mount, observers said.

"When you have economic and credit circumstances such as this, there are going to be borrowers who don't deserve to get credit under the same terms and conditions they might have gotten a few years ago," said David Gibbons, deputy comptroller of the currency for credit risk.

And as banks insulate themselves against losses by passing risks along to the marketplace and to investors, investors - perhaps burned by losses from defaults - are beginning to demand higher premiums, Low said.

"The cost is that rates for all corporate borrowers have increased because more people are involved, more people are bearing the brunt," he said.

Regulators classify loans as adversely affected if they have "well-defined weaknesses," which can include default. Another category of loan exhibits potential weakness that may result in bigger problems if left uncorrected.

Together, problem and potential problem loans made up 23 percent of the total of $1.9 trillion in loan commitments, the regulators said.

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