Collapsed & infirm lending? Not so, say several C&I lenders

RMA Journal, The, May, 2004 by Beverly J. Foster

"Our primary regulator is the Fed," says Garrigus. "They've been great--very balanced and fair, in my opinion. While I appreciate the benefits of Basel II, it has limited applicability to an institution our size, and we're really not spending any time on it. Our greatest challenge is to execute our own business plans with as much precision and expertise as possible."

"Basel II is having some impact on BNK," says Schreiber, although he believes it's not major. He feels that adopting some of the primary principles of Basel II would enhance the risk management process at BNK. "Competition is keen in pricing and, in some cases, underwriting," he says.

"Since we are owned by the largest Canadian bank, which will have to implement the advanced approach under Basel II, it is exerting some influence on RBC Centura," says Bolger. "That said, we have already implemented many of the requirements of Basel II that directly affect C&I lending. Therefore, competition and our own geographic expansion are greater influences on us at this time. The competitive element is mainly from a pricing perspective (we are seeing a lot of deals being 'bought'). Our acquisitions and de novo expansion are taking us into new marketplaces that have different lending requirements and expectations. We need to address those to be competitive while keeping within our risk appetite."

What are some current weaknesses you're observing among institutions vis-a-vis C&I lending?

"I see some stretching of credit standards," says Willoughby. "Currently this is limited to a few institutions in relatively isolated markets. There appears also to be a problem with broadly syndicated credits. They continue to be originated with relatively weak covenant structures, voting rights, maturity, and amortization schedules. AmSouth has chosen not to be a significant player in this business."

Hogan concurs, saying, "I see evidence every day of credit being priced below levels required for a reasonable return on risk-adjusted capital. As we have seen in the past, this is not a sustainable practice in the long run for those institutions engaging in such behavior."

"The people who don't understand the risks are the ones most likely to underprice for them," says Garrigus. "Regulation defers the market discipline that would otherwise befall weak competitors."

Perhaps homing in on the problem, Schreiber says, "Some of the current weaknesses we've observed have been in smaller banks in our footprint. In some cases, these banks have given up on sound underwriting principles--that is, no guaranty, no loan covenants, and so forth. In addition, some banks are making interest-rate bets that are not prudent."

What are some current strengths?

"While rational pricing may not prevail in all segments of the market right now, it seems as if credit underwriting standards are being maintained," says Hogan. "This is most evident in the commercial real estate arena, where true discipline has been exercised by lenders during the recent downturn; C&I standards also have been upheld."