If you're having trouble getting a business loan or a mortgage from a bank these days, the problem may not be with you or your credit history. The problem may well be with your bank.
As banks find a rising percentage of their commercial, real estate and industrial loans going bad, they are husbanding their capital and tightening their standards before offering new loans, even to deserving customers.
"The credit crunch isn't getting worse, but it isn't getting better," said Mark Zandi, chief economist for Moody's Economy.com.
"The financial system remains far from normal," he said. Across the country, midsize and small banks "are still under significant pressure," and many could well fail as more commercial and real estate loans go bad.
Bloomberg News estimated last Thursday that more than 150 publicly traded U.S. lenders have nonperforming loans on their books that equal 5 percent or more of their total holdings, a level that could threaten their viability unless they raise more capital.
"Banks are less willing to extend credit. They have a precious amount of capital, and they are at a point where they have seen the health of their loans deteriorate quickly, so they have less confidence to extend credit," said Kevin Fitzsimmons, a banking analyst for Sandler O'Neill & Partners LP in New York. "They need to hold their capital for the loans that may yet go sour."
Already this year, 77 banks have been shut down by the Federal Deposit Insurance Corp., and "it's reasonable to expect there will be more failures," said Fitzsimmons.
On Monday, the Federal Reserve reported that despite a huge infusion of government money into the banking system, U.S. banks tightened standards on all types of loans in the year's second quarter and said they expect to maintain strict criteria on lending until at least the second half of 2010.
While the supply of credit is being tightened, the Fed reported that demand is shrinking, too. Consumers and businesses remain wary of seeking new loans, and about 40 percent of banks reported that loan demand by large corporations had shrunk, while more than half said there was less demand from small business.
Analysts see a growing gap between the financial health of the nation's top banks, which benefited from confidence-building moves by the Federal Reserve and the Treasury, and smaller banks that are not seen as critically important to the financial system.
Last winter, when many Americans feared the entire banking system might be near collapse, the Fed and the Treasury conducted "stress tests" on the nation’s top 19 banks, which account for nearly two-thirds of all lending in the United States. That accounting exercise analyzed how each bank’s loan portfolio would perform under adverse conditions.
After the exercise was completed this spring, many of the banks enjoyed a resurgence of investor interest, selling new stock or finding outsiders willing to buy a stake of the business. That boosted their supply of cash as a cushion against future losses.
But the nation's midsize and small banks were not included in the stress test, and some of them are now struggling to survive. "Hundreds of billions of dollars in commercial mortgage loan defaults threaten to upend hundreds of banks with large loan portfolios relative to their capital bases," Zandi said in a research note this week.
"What the government did for the top 19 [banks] was very unusual," Fitzsimmons said. "For the other banks, if you have a high degree of nonperforming loans and not enough capital … you need to do something," he said, "or you'll be told to do something by the banking regulators."
One example: Just last Friday, Colonial Bank of Montgomery, Ala., collapsed under the weight of souring residential construction loans in troubled markets such as Florida and Georgia, and was taken over by BB&T Corp.
Banking consultant Bert Ely noted that after years of promiscuous lending, many banks have changed course and significantly tightened their lending standards. "It's a necessary adjustment, and for the longer term, it's actually a positive," he said.
But Ely agrees that more failures are coming for banks that carried out "unwise lending and unwise acquisitions in markets that were already overbuilt."
The number of bank failures, Ely said, will depend on how aggressive federal regulators become, and how successful troubled banks are at raising additional capital. "I think there still is investor appetite" to buy into troubled banks, Ely said, "if the price is right."
For now, Ely is advising consumers and business owners to ensure they have healthy lines of credit and a relationship with a strong bank.
"The worst thing is to have an open line of credit with a bank that fails," Ely said. Such customers may find themselves unable to refinance their obligations with a new bank as the credit system continues to tighten.
Michael Zielenziger writes about business and the economy. He lives in the San Francisco Bay area.