The past two years haven't been kind to small businesses looking for bank financing. Many banks, feeling the heat from federal regulators and their own investors, have scaled way back on their lending activity. And even those doing deals have approached them more gingerly. But if you're looking for banks to become more aggressive soon, you may be disappointed, says Con Chapman, a partner with the law firm of McDermott, Will & Emery, in Boston, who specializes in bank lending. Indeed, Chapman predicts that over the next few years weaker institutions will be under more pressure than ever to raise capital and trim their loan portfolios.

What will that mean? "We'll see more mergers and more asset spin-offs," Chapman says. "And while they may be good for some individual banks, they won't necessarily be good for the bank customers." Broadly speaking, the credit crunch may wind down, he notes, but some borrowers won't notice the difference.

If you want to track the fortunes of banks, a number of bank-rating services offer information that will help you. (See "Bank Watching," Banking & Capital, September 1991, [Article link].) In addition, Chapman suggests monitoring banks for the following developments:

* Asset sales. Ordinarily, Chapman says, a bank's decision to sell assets (for example, a credit-card operation) can be good news. After all, it's a way to boost lending capital. "But you really want to know what was driving the decision to sell," he says. By reading financial publications and talking to people in the industry, you may learn that the bank is selling assets because it's unable to sell stock.

* Once a bank sells assets, borrowers may benefit -- but they may not, Chapman explains. "A bank that's sold its best assets may be more cautious. If the bank needs to raise additional capital later on, it will be harder."

* Dividend reductions. On the surface, a bank's decision to cut or omit a dividend has positive implications for bank capital. But lurking behind the decision could be bad news for bank customers. Even if bank management made the decision out of fiscal prudence (without pressure from regulators), borrowers may soon get squeezed, says Chapman. "It often means that the bank is also planning to reduce its loans by doing things like not renewing lines of credit."

* "Agreements" to raise capital. Bankers frequently try to put an upbeat spin on asset sales and dividend reductions, says Chapman. But when they announce an "agreement" with regulators to raise money, the decision wasn't voluntary. "In effect," Chapman explains, "they're mandatory directions to ensure that the government doesn't have to pay claims on deposit insurance." Usually, local newspapers report on the agreements; they're also noted in more specialized publications like American Banker and Federal Reserve Bank Notes, both of which you can generally find at libraries and through accounting firms.

* Orders to cease and desist. If a bank has been ordered by the Federal Deposit Insurance Corp. to cease imprudent lending, consolidate operations, or take other steps to put its house in order, things have gotten serious, says Chapman. (If your local paper doesn't report on the orders, they'll still be noted in the publications above.) Banks in that state tend to have their hands full dealing with problems, he says. "So, if you haven't begun to look for a new bank, it's probably a good time to initiate that process." -- Bruce G. Posner