Headline: Fed Finds More Banks Tightening Loan Rules [excerpts]

Stricter credit policies could have dire effect on California's smaller firms as other financing also dries up.

Source: Los Angeles Times, 6 Feb 2001

[Sorry, I don’t have an URL handy at the moment – try archives at www.latimes.com ?]

U.S. banks continued to tighten lending standards as the economy softened in the last three months, deepening concerns that more businesses and consumers will find themselves unable to secure loans. The bank loan data, reported in a Federal Reserve survey issued Monday, raise the specter of a more serious credit crunch that could have dire effects on the economy. A credit squeeze could hit hard in California, where many small and mid-sized companies depend on bank loans to finance their operations and expand their businesses.

Almost 60% of domestic banks, and an even higher percentage of foreign banks' U.S. offices, said they have adopted stricter lending policies for commercial and industrial loans to large and mid-sized companies, according to the Fed's January survey of senior bank loan officers. About 45% of banks said they have tightened standards for smaller companies, according to the survey. Many banks also were more strict with commercial real estate loans and some consumer loans...

"It's a definite cause of concern," said Glenn Yago, director of capital studies at the Milken Institute in Santa Monica. "We have to be careful not to go into a period [like the one] that precipitated the recession of the early '90s, which was clearly credit crunch-driven."

Most economists agree that credit conditions are looser today than they were a decade ago, when banks slashed their lending dramatically amid steep losses caused by soured real estate and other loans. But experts worry that the financing environment for some companies is worsening almost daily. The market for initial public offerings of stocks has dried up with the plunge of Nasdaq last year, and venture capital firms also have turned much more cautious about investing in new businesses, recent data show.

The situation is more acute in California than in many other regions, Yago said. California companies already are struggling through the state's energy crisis. California also is home to a large number of small and mid-sized businesses that rely heavily on bank loans, he said...

Companies often react to tighter bank credit by turning to alternative financing sources such as asset-based lenders. But signs are emerging that even these finance companies are becoming more selective. Mark Brutzkus, an Encino attorney who represents firms in the Southern California apparel industry, said a recent wave of consolidation among factoring companies--financiers that purchase accounts receivable--has left many small garment makers without a dependable source of working capital…"It has become a big problem for some of these little guys," said Brutzkus, partner in Ezra Brutzkus Gubner. "They are really getting squeezed." ...

-- Andre Weltman (72320.1066@compuserve.com), February 08, 2001