Commercial Banks Increasingly Link Corporate Credit to the Purchase of Other Bank Services

According To The Association For Financial Professionals' 2004 Credit Access Survey Pressure To Award Other Business Grows As Consolidation Increases Among Commercial Banks

JUNE 9, 2004 – BETHESDA, MD – Commercial banks frequently make access to credit contingent upon the purchase of other financial services despite assertions by regulatory bodies to the contrary, according to the "2004 Credit Access Survey," released today by the Association for Financial Professionals (AFP). The key findings of the survey are:

• Half of respondents from all companies (50%) and nearly two-thirds (63%) of respondents from "large" companies (those with annual revenues greater than $1 billion) indicate that, over the past five years, a commercial bank has denied them credit or changed credit terms because the company did not award other business to the bank.
• 96% of respondents from large companies (87% from all companies) report that they are subject to pressure from their credit providers to award other business.
• 47% of respondents from large companies (41% from all companies) say the pressure to award other business has risen over the last 12 months.

The survey indicates that the practice of linking credit to other bank products is prevalent in the market for all size companies, but that larger companies are more likely to be subject to linking activity in part because their size and complex credit needs limit the number of commercial banks that are able and willing to serve them.

Jim Kaitz, President and CEO of AFP commented, "Credit is the lifeblood of our nation's corporations, and the availability and pricing of credit are of fundamental importance to maintaining efficient capital markets. The pressure on companies to award non-credit business has increased significantly over the last year, according to our latest survey results. It is now time for the Federal Reserve and other regulators to provide a clear interpretation of what constitutes illegal tying, and take steps to improve the oversight and enforcement of the anti-tying restrictions for all companies regardless of their size."

The survey, which was conducted in February 2004, consisted of responses from 370 financial executives that are members of the Association for Financial Professionals and who are on the front lines of this issue managing banking relationships and securing credit for their corporations.

Other highlights of the survey findings include:

• A third (33%) of respondents from large companies indicate that a commercial bank has explicitly told them that they were denied credit or had credit terms changed because they did not award the bank other business.
• Meanwhile 59% of respondents from large companies report that a commercial bank implied that they were denied credit or had credit terms changed because the company did not award the bank other business.
• Over half (53%) of respondents from large companies were denied credit or had credit terms changed in the past five years after they did not award investment banking business to a commercial bank.
• A third (33%) of respondents from large companies indicate that banks "rarely" or "never" offer the option of purchasing credit as a stand-alone offering.

Section 106 of the Bank Holding Company Act (BHCA) prohibits banks from extending credit or furnishing any product or service, or varying the price of any product or service, on the "condition or requirement" that the customer obtain some additional product or service from the bank or its affiliate. While previous AFP surveys in 2002 and 2003 generated interest around this issue, which is commonly referred to as "tying," the Office of the Comptroller of the Currency stated (in a September 2003 white paper) that there was no empirical evidence indicating that national banks tie lending to underwriting activities, while the General Accounting Office noted (in its October 2003 report) that, due to the nature of credit negotiations, it is exceedingly difficult to find "documentary evidence" of tying.

The survey specifically asked about several practices that the Federal Reserve discussed in its proposed interpretation of the Bank Holding Company Act regarding tying. The findings from these questions include:

• More than a quarter of respondents from large companies (28%) indicate that they have been subject to exclusive dealing requirements from a commercial bank.
• More than half of respondents from large companies that are subject to revenue targets (52%) indicate that they cannot meet the targets imposed by credit banks without awarding bond or equity underwriting and/or strategic advisory services.
• 15% of large companies were explicitly required to obtain corporate debt and/or equity underwriting services from an affiliate of the bank in order to obtain a loan.

In conclusion, Jim Kaitz said, "All three of AFP’s credit access surveys clearly demonstrate that these practices are becoming common in the marketplace, so much so that in the new survey 9 out of 10 large companies expect to be denied or pay more for credit should they not award other business to banks. With loan commitments to commercial borrowers currently totaling $1.6 trillion, it is critical that the Federal Reserve and other regulators acknowledge the extent of these practices, and both clarify and enforce the regulations to ensure transparency, choice, and fair terms of credit for America's corporations."

The 2004 Credit Access Survey is available on the AFP Web site at the following address: www.afponline.org/creditaccess. In addition, the 2003 and 2002 AFP Credit Access surveys are also available on the site.