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Banks are Finally Lending, But Some Fear They Aren't Charging Enough for the Risk Banks are Finally Lending, But Some Fear They Aren't Charging Enough f...

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Economy / finance

Banks are Finally Lending, But Some Fear They Aren't Charging Enough for the Risk

photo of Catherine Hollander
June 21, 2011

Investors want loans. Banks want to boost their revenues. But recent data has caused analysts and regulators to fear that in their bid for business from corporate borrowers, banks aren’t charging enough to cover the risks they are assuming, The Wall Street Journal reports.

Banks have struggled to boost revenues recently. The gap between what banks spend on funding costs and what they earn on assets, known as “spread,” shrank for many banks in the first quarter of the year, the Journal said. They are now aggressively pursuing new business.

This development is good for borrowers, but analysts fear banks are cutting loan prices and sacrificing lending standards to make deals.

 

Regulators are closely watching the risky leveraged-loan market, which includes floating-rate loans. Banks arrange the loans for companies and sell pieces of them to investors, who find them attractive because they are unique fixed-income vehicles that benefit, rather than suffer, from rising interest rates. Investors have recently been pouring money into these loans.

Floating-rate loans to company borrowers include a cushion under the loan’s interest rate, known as a Libor floor. Libor floors set a minimum amount a borrower must pay over a key bank-borrowing index. According to Standard & Poor’s Leveraged Commentary & Data and Barclays Capital, loan deals have included Libor floors around 1.25 percent in recent weeks, a sizable drop from 3.30 percent in early 2008.

The easing of bank standards may be a sign that market terms are softening and better positioning borrowers to negotiate loan terms. The recent push for loans contrasts the credit squeeze of recent years, the Journal said.

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