The Wall Street Journal-20080204-Ahead of the Tape

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Ahead of the Tape

Full Text (570  words)

Smaller Lenders

Feeling Squeeze

Of Credit Crunch

The next phase of the financial crisis could be coming soon to a bank near you.

The high-yield, or junk, bond markets already have seized up. Wall Street giants, stung by toxic subprime-mortgage-related debt, have tightened their purse strings. Now, it is starting to look as if smaller banks might be catching on to the wave of risk aversion that is tightening credit around the nation. Nervous regulators, worried about lax lending standards, could amplify all of this.

Listen, for example, to Jim MacPhee, chief executive of Kalamazoo County State Bank in Schoolcraft, Mich., which has $70 million in assets and three branches. He says federal examiners have been poring over his bank's books for weeks as part of a regular checkup. "They are scrutinizing and really drilling down into the loan portfolio like we've never seen them do in the past," says Mr. MacPhee, who has been with the bank for 35 years. He says the tighter scrutiny will make it tougher for his bank to make loans.

"I'm hearing from my member bankers that the regulators from state and federal regulatory agencies are really coming in and cracking down," says Camden Fine, president of the Independent Community Bankers of America, a trade group for small banks.

Rusty Cloutier, chief executive of little MidSouth Bank in Lafayette, La., says he is saying no to more and more borrowers. "Are we turning down more loans? Absolutely," says Mr. Cloutier, whose bank is a unit of MidSouth Bancorp Inc., which has $854 million in assets. More people are coming to him for loans because they are being denied elsewhere.

A Federal Reserve survey of senior loan officers, expected as early as today, will shed light on the nation's lending environment. The Fed's October survey showed loan officers were tightening standards on everything from consumer loans to mortgages to commercial real estate.

Could this be a replay of the early 1990s? Back then, banks and savings-and-loan institutions had gone through a real-estate boom and bust, followed by a regulatory crackdown. A lasting credit crunch ensued, hurting consumer spending, small business and real estate. Now, as then, some critics are starting to say regulators are stepping in too late, clamping down on banks even as the Fed cuts rates to encourage more spending and lending.

One area of growing concern, outside housing, is commercial real estate. "We've been picking up evidence that there are higher levels of nonperforming loans" in commercial real estate, says Bob Garsson, spokesman for the Office of the Comptroller of the Currency, which oversees national banks.

The ratio of commercial real-estate loans to capital at the nation's community banks has nearly doubled in the past six years to 285%, according to the OCC. Lending was especially robust in areas where there were housing booms, such as Florida.

Of course, there are important differences between then and now. Markets for loans have expanded and may be quicker to adjust. Banks are better capitalized, and fewer borrowers are defaulting on loans than in the early 1990s.

What is more, the pain this time around has been felt mostly by Wall Street megabanks. Still, the credit crunch may be trickling down now and hitting smaller firms, just as it did in the 1990s. If history is any guide, this credit mess is going to take a long time to clean up.

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