More commercial loans are being made by banks desperate to reverse rapid losses in profits. According to Moody’s Investor Services, standards for making these loans have become to loose, and recently refused to give an investment score to the commercial loans being packaged into bonds by Wall Street.
One of the three large credit rating agencies, Moody’s has taken a stronger stance on the state of the economy than it has in the past. Last month Moody’s CEO Ray McDaniel explained that while markets have been stable through government turmoil, it is an indicator that the economy could take dramatic falls once situations reach a certain point of stress. The company has also expressed strong warnings against the lack of management in pension crises across the country.
Many investors looking to buy bonds rely on ratings to determine the risk involved. Higher rated bonds have better guarantees of stability and growth, while lower rated bonds have greater chance of failing or dropping in value. Lower rated bonds are less expensive, however, and have a small chance of producing high returns. Fitch and Standard & Poor’s, the other credit ratings agencies, gave the bonds in question the lowest possible rating.
“Commercial loan growth has led to heightened competition, resulting in weaker underwriting standards and narrower pricing,” Moody’s analyst Megan Snyder said. “This growth has occurred while corporate borrowers have become more levered as their debt has increased more than their profits.”
Profits from regional banks have suffered from low interest rates and higher costs, so as commercial loans become more profitable more get issued. Analysts say that another reason standards are being lowered is because the quality of businesses that need loans are lower than in a rapidly growing economy.