Be prepared for another jump in loan losses at the nation's major banks.
Unless Paul A. Volcker is a magician at the Federal Reserve Board and guides the country through an era of tight money without triggering a recession, some consumers, businesses and countries will find it increasingly difficult to pay back their bank loans.
But analysts and bankers say the industry is better prepared for a spate of loan defaults than it was in 1974. And even then, they say, when some of the nation's biggest and best-known banks were placed on special watch lists by the comptroller of the currency -- Citibank and Chase Manhattan among them -- the banking industry survived intact. Bank profits even continued to rise, although certainly at a much lower pace than earlier.
Warren Marcus, chief banking analyst at the investment banking firm of Salomon Brothers, said there's no doubt bank loan losses will rise in the months ahead.
"But the question is by how much," he said. "And we doubt it will be to a threatening degree."
As they did in the years preceding 1974, bank loans have been growing very swiftly in 1978 and 1979. But unlike the earlier period, these increase have been in loans made to traditional borrowers, bankers argue. t
"In 1973, we threw money around like it was going out of style into new and untried areas such as the real estate investment trust," said one banker.
In recent years, however, banks have increased their lending sharply, mainly to reflect the higher costs of doing business.
Nevertheless, a deep recession could trigger serious loan loss problems for the entire banking system, according to Albert H. Cox Jr., chief economist at Merrill Lynch and Co.
Marcus says he doesn't discount the possibility of serious difficulties, and also notes that banks -- which were surprised and burned by the 1974 economic debacle -- have made bigger provisions for loan losses in recent years than in the past.
Nevertheless bank earnings will grow more slowly during the coming 15 months because of worsening economic conditions, he said.
John Heimann, comptroller of the currency, has warned that new Federal Reserve monetary policy measures making it harder for banks to lend money also could cause them severe problems in profitability and might cause some failures.
Major failures aren't likely to be in the offing unless depositers and investors lose confidence in the ability of financial institutions to deal with loan problems. Most banks fail because of fraud -- as in the case of Franklin National in 1974 -- and not because of loan losses.
Nevertheless, banks will face serious problems in several areas if the economy heads into a serious downturn:
Consumer loans. Bank lending to consumers has grown sharply in recent years, Marcus noted. The price the consumers are paying to maintain that debt is very high -- whether it be for auto loans, second mortgages or credit card purchases.
Cox noted that delinquency rates on consumer loans have remained at historically high levels even during the last four years of economic expansion. If the economy goes into a tailspin and unemployment rises, consumer defaults would grow.
Real estate loans. Although real estate values have been rising markedly in the last several years, a good part has been due to speculation. Experts predict that the heady growth in real estate prices in the Washington area will slow noticeably in coming months. In parts of the country where the underlying demand for housing is not as strong -- and where wealthy individuals are no as dominant -- prices could drop.
Nevertheless, Marcus notes, this would be a major problem only among banks' most recent loans. On a loan made four years ago, or even two years ago, the property value has risen so markedly that banks would be protected in the case of a default.
Foreign lending. Just like consumers, many foreign countries have been buffeted by rising oil prices that force them to borrow from major American banks to pay their oil bills. If the United States slides into a major recession, these countries would be caught in a double bind.
But although U.S. banks are heavy lenders to the Third World they have directed their loans to the bigger, more stable Third World countries. "Of course, if we're talking about a Brazil or a Mexico defaulting, then we're talking about something," Marcus conceded.
Banks probably could afford to take a drubbing in any one of these areas without facing serious difficulties. Even in 1975, when banks made provisions for $3.2 billion in loan losses, the banking industry continued to make a profit.
"If bank earnings had gone down then, there might have been a serious problem," said Marcus. "But they did not, and people calmed down."
There are a lot of uncertainties about the future, he said, and Salomon will not make an earnings projection for banks in 1980 because of those uncertainties.
"I don't want to take bank problems too lightly, but I think the industry is in a considerably better condition to deal with a recession than it was in 1974," Marcus said.