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`Capital Crunch' in New England

New accounting rules will help US banks lend more; Northeast banks face real estate troubles

IN a period of economic slowdown, it is not surprising that bank lending declines along with business activity. In New England, where the recession is deeper than elsewhere in the nation, business leaders say a bank credit crunch is putting an extra hard squeeze on the economy. ``We see a lot of good little companies that want to expand'' and cannot get new lines of credit, says Joseph Blair, executive director of the Massachusetts Industrial Finance Agency.

On Friday, Treasury Secretary Nicholas Brady heard this message in meetings with business leaders and politicians in Connecticut, Rhode Island, and Massachusetts. He said that accounting changes by federal examiners would enable the region's troubled banks to lend more.

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Mr. Brady acknowledged, however, that the changes will not take effect overnight. And even then, the role of the examiners is only part of the credit problem.

``I would call it a capital crunch,'' says Eric Rosengren, an economist with the Federal Reserve Bank of Boston. As banks write off large amounts of bad real estate loans, many are shrinking in order to keep their capital-to-asset ratios in line with international standards.

One way to raise capital is to issue new stock, as Citicorp and Security Pacific have recently done. But for many New England banks, this is not an option.

``The Treasury proposal will do nothing for some of our banks,'' says Marcel Veilleux, president of the New Hampshire Bankers Association. He says that cash infusions, called ``open bank assistance,'' from the Federal Deposit Insurance Corporation may be the only way the insurer can avoid more bank takeovers.

The FDIC took control of the Bank of New England in January, and is taking bids until March 29 to find a new owner for the bank.

On Friday, Dartmouth Bancorp Inc. of Hookset, N.H., said it was technically insolvent, with losses exceeding equity capital. In what could become a test for open bank assistance, the bank is said to be lining up private investors to commit money, after which the FDIC may step in with more cash.

But the federal government's main approach to easing credit has been the new accounting regulations announced March 1. These will allow banks to report more income on loans.

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Examiners will now value real estate based on its long-term value, rather than the current market value.

``That is one of the most encouraging things we've heard out of Washington in a long time,'' Mr. Veilleux says.

Before, if a bank made a loan of $800,000 against a property valued at $1 million, and the value then dropped to $700,000, an examiner might require the bank to write off all or part of the loan, even though the loan is still earning income.

Another key change would allow ``loan-splitting,'' in which a loan could be divided into performing and nonperforming parts, rather than written off entirely. This rule must be approved by the Securities and Exchange Commission after a month-long comment period.

Small changes in banks' capital position can make a big difference, Mr. Blair says, since $1 of capital can back up to $15 in loans.

These accounting changes came at ``the insistence of the New England delegation'' in Washington, says Bay State Gov. William Weld (R). New England business leaders had complained of a credit crunch for almost a year. The question is ``whether the regulations have been fully communicated'' from top officials to the examiners, Mr. Weld says.

``There is a need to address the issue nationwide,'' says Mark Burneko, spokesman for the American Bankers Association. He says there is growing concern of a credit crunch in Florida.

Banks may be justifiably more cautious during a recession, but with the Gulf war over, President Bush told Congress last week that ``Americans can move forward to lend, spend, and invest.''

Two factors mitigate the effect of the capital crunch in New England, observers say: weakness in demand for loans, and the entrance of other lending institutions in the market, including national and foreign banks and nonbank companies such as insurance firms. Commercial finance companies are ``starting to eat the banks' lunch on this,'' says John Gould of the Associated Industries of Massachusetts.

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