WSJ-Bank Lending May Feel Bite of Credit Storm

Bank Lending May Feel Bite of Credit Storm

"With therecent trouble in subprime, lenders are questioning the safety ofholding such paper. The amount of asset-backed commercial paperoutstanding fell by $77 billion, or 6.8%, to $1.06 trillion -- thebiggest percentage decline ever.

The flight into Treasury billsand the drop in the amount of asset-backed commercial paper may beclosely linked. Credit-rating providers have only just begundowngrading their ratings on credit instruments backed by subprimemortgages. Similarly structured instruments backed by other kinds ofdebt also may be at risk for rating downgrades.

This poses aproblem for banks. According to international banking standards, thelower the rating on a bank's credit portfolio, the more money it needsto keep in reserve in case the assets default. If ratings are cut on awide swath of the portfolio's holdings, then the bank has to raise cashin a hurry.

Analysts at GaveKal Research, Hong Kong, believe thefear of such downgrades has driven banks around the world to reducetheir credit holdings. That would prompt them to both cut back on theamount of commercial paper they hold and the amount of commercial paperthey issue. Cash from the sale of some of their holdings then goespouring into Treasury bills.

The result of the banks' drive toshore up capital, say the GaveKal analysts, is that in the months tocome, the ability of banks to make loans will be "seriously inhibited."If that's right, the real trouble may have only just begun."