Tough Times/Tougher Banks: Bank consolidation and the recession have made it more difficult for companies to find lenders ready and willing to give them money.

• Author: Milligan, Jack
• Position: Banking

A decade's worth of consolidation has so altered the country's banking system that U.S. corporations are being forced to structure their relationships with lenders in a profoundly different way. Gone are the days when commercial banks would compete for a company's business like raucous rug merchants at a Middle Eastern bazaar. In a trend that has strengthened during the current recession, large banks are seeking deeper and more profitable relationships with their corporate borrowers -- and turning away those who aren't willing to play along.

Recessions come and go, just as this one most surely will. There's one thing that won't change, however: Companies will find themselves under increasing pressure to deepen their relationships with bank lenders, whether that's an opportunity to manage their foreign exchange exposures or underwrite a stock or bond offering. Banks are intent on boosting their returns to shareholders, and lending is a low-margin business to begin with. And now the nation's economic downturn has made most banks even more reluctant to lend money to corporations, resulting in a credit crunch for many borrowers.

"Your typical middle-market Fortune 1000 company just doesn't have enough business to go around to a large number of financial providers," says R. Charles Shufeldt, an executive vice president for corporate and investment banking at Atlanta's SunTrust Banks Inc. "They just can't satisfy us, and we're becoming more demanding."

From a bank's perspective, the advantage of forging a deeper relationship is obvious. When it can sell fee-based services like cash management or the administration of a 401(k) program, the relationship becomes more profitable. "The benefits to the customer should be obvious, too," says Jack Neal, a managing director in charge of corporate banking relationships at Bank One. "If they don't do that, they won't have a bank."

Still, from a borrower's point of view, there can be advantages to working more closely with a smaller number of banks. The reward may be a greater measure of loyalty during times of economic stress -- which, of course, is when loyalty counts the most. "To use a baseball analogy, the tie goes to the runner," says Arthur McDonald, a partner at Tatum CFO Partners, a consulting firm for finance departments. "If you're a valuable business proposition for the bank, it's going to help you."

In part, the trend towards relationship banking has been driven by the banking industry's sharp contraction over the past 10 years. One statistic pretty much says it all. There were 11,927 commercial banks in...