credit standards (2)

standards need to be sustained across the economic cycle . They should not be relaxed in good times or over-tightened in bad .In general ,companies look better at the top of the cycle and weaker at the bottom than they realy are. Therefore,logically ,monitoring needs to be most strictly applied as the cycle reaches its peak;but this is Just the time when companies are tending to seek to drop or weaken covenants as they flex their muscles in the more competitive market place as far as lenders are concerned.The temptation for banks to look at the favourable surface factors and ignore the longer-term risks is greatest, as is the pressure not to lose 'good business' To succumb to this pressure -as banks historically have- is to sow the seeds of losses in the next recession . the losses in recession reflect the mistakes banks make during booms.
conversely , at the bottom of a recession,survival can be the best proof of management quality and the ultimate robustness of a business that there is.companies are likely to be at their most chastened by their recent experience and unlikely to be going for over-expansive and risky plans .Even if they do ,they have several years of improved economic conditions a heat of them in which they can pay off their borrowings and get away with all but damaging mistakes.