Bank officials warned they may have to oblige lenders, causing particular concern to increase the proportion of loans covered by capital reserves. The ease with which Glaxo, the pharmaceuticals giant, recently raised pounds 9bn in bank loans at a surprisingly keen rate to support its takeover bid for Wellcome, was seen as highlighting the new trend. "From a supervisory perspective, a key concern is that banks may no longer be charging borrowers adequately for the risks they are taking," the Bank said in its Banking Act for 1994/95 report, published yesterday.
The most visible sign of what the Bank called a "marked relaxation" in lending conditions for large corporate borrowers has been the sharp fall in margins on syndicated lending, now at their lowest levels since 1989. The Banking Act report also highlighted lower fees, lengthening maturities and looser conditions on loans as other indications of falling standards.
Whereas banks were typically asking for a high-quality five-year corporate loan, a margin of Libor plus 30 basis points, it has now become common to offer a margin as low as Libor plus 15.
Banks are being pushed into this excessive shrinkage of margins by a combination of intense competition among lenders and only sluggish demand from corporate borrowers. The Bank report said there is a "risk that tighter margins on lending to high-quality borrowers will drag down margins for less creditworthy borrowers and that banks will be tempted to boost their interest income by taking on lower-quality lending on which margins are higher but do not adequately reflect additional risk."
The Bank also questioned the argument that commercial banks are offering excessively keenly priced loans as a way of building up wider business relationships with clients.
The Bank described the loosening of loan conditions as a "worrying development". Laxer loan conditions "may mean the scope for lenders to monitor the financial health of borrowers, receive early warning of problems and press for remedial action is considerably diminished," the report said.
The report also noted the Bank's new willingness to consider easing the conditions under which banks may repay capital to shareholders or bondholders. Because of the significant improvement in earnings, banks now have much higher comfort margin of capital above the minimum capital requirements set by regulators. "There is also a risk that resistance from supervisors to attempts by banks to reduce surplus capital could encourage an expansion of balance sheets," the report said. The Bank said that it has reviewed circumstances in which it is willing to allow banks to repay capital, although requirements will be more onerous where a bank is seeking to repay Tier 1 capital rather than Tier 2 capital.