Much has happened in the commercial credit markets as a result of the Great Recession, but it comes as no surprise given the conditions that existed before the credit crunch.
Background
Prior to 2000 there were fewer banks in metro areas like Chicago and their lending criteria were typically conservative. Borrowers had fewer choices and less negotiating leverage when seeking business financing. What followed was a rapid increase in the number of bank branches and the entry of many new players to the market. Case in point, there are now 128 commercial banks and 1547 branches in the Chicago land area (FDIC report, June 30, 2010). As competition increased a growing number of banks began to relax their lending criteria in order to capture more market share.
Greater availability of liberal credit gave borrowers, and even those of marginal credit worthiness, more options to choose from. As the scales tipped in their favor they were able to negotiate more liberal terms with willing lenders. Once on board with a bank if a borrower did not fulfill one or more of the loan agreement covenants (referred to as “tripping a covenant”), lenders often looked the other way, lest the customer go to a competing bank willing to take the risk.
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