There is now "at least some hope that the worst of the bank credit crunch may be over," says William V. Sullivan Jr. of Dean Witter Reynolds Inc. The money-market economist notes that while total commercial bank credit expanded at a modest 3.2% annual rate in September, commercial and industrial loans rose for the first time in six months, hitting a 6.7% annual clip. Indeed, the $3.4 billion gain in the C&I category was the largest in 23 months.
Thus far, however, the pickup in business lending has occurred exclusively on the balance sheets of foreign-related banks, which added $4 billion in c&i loans in September. With regulatory restraints apparently inhibiting business lending by big U.S.-chartered commercial banks, foreign-chartered institutions are continuing to gain market share-accounting for 23.1% of all c&i loans extended in September, compared with 19.2% a year earlier.
Still, Sullivan thinks there's a fair chance that U.S. banks will soon follow the lead of their foreign competitors by accelerating business lending. And if they do, he adds, there's also a risk that intermediate and long-term interest rates could be pushed higher. That's because any surge in c&i loans by the banking sector may well be accompanied by a cutback in its appetite for federal debt-just at a time when the Treasury's cash needs will be rising sharply.