Regulators Urge Banks to Loosen the Purse Strings


Federal financial regulators, seeking to ease fears of a credit crunch, issued an extraordinary statement Friday telling banks and thrifts to avoid being “overly cautious in their lending practices.”

After hearing months of vociferous complaints from New England business executives who say they have been unable to get credit, regulators decided to send a clear signal to bankers that it is all right to lend. They also offered specific steps to help encourage lending.

The actions reflect growing concern that regulators may have overreacted to the excessively risky business practices that contributed to the failure of many banks and savings and loans by subjecting lenders to unnecessarily stringent oversight.


The message, which puts regulators in the unusual position of encouraging more aggressive lending, should create a more relaxed atmosphere in bank boardrooms and at meetings of loan committees throughout the country, not just in New England, regulators believe.

“We’re sending a message to boards of directors . . . (that) we don’t want you to turn away good borrowers,” Jonathan Fiechter of the Office of Thrift Supervision said at a news conference at the Federal Reserve Board offices. Echoing the same theme were officials from the Fed, Office of the Comptroller of the Currency and Federal Deposit Insurance Corp.

The agencies oversee the work of 12,000 commercial banks and 2,400 S&Ls.;

The Bush Administration, sympathetic to the complaints from business executives and New England elected officials, applauded the action.

“I commend and stress the importance of the regulators’ commitment to promptly communicate these policies to the nearly 7,000 bank examiners in the field,” Treasury Secretary Nicholas F. Brady said in a prepared statement.

To drive home the message, Deputy Treasury Secretary John Robson invited reporters to his office to tell them that fearful bankers had been worrying that they would “get hit in the back of the head if they make a loan.” Friday’s joint policy announcement by the regulators “will have the effect of restoring confidence,” he said.

“There really has been a tentativeness about lending, created in part by fear of regulatory retribution,” he said.

In a swipe at bank examiners, Robson said, “Regulation is not intended to be a terrorist activity.” The regulators’ job, he said, is “supervision of the industry, not to demolish the industry. The 1980s competition in laxity may have turned into competition in piety.”

Regulators insisted at the press conference, however, that their joint statement did not represent a change in policy. They also denied that they were backing away from strict regulation under political pressure.

Instead, they said, they were clarifying rules to deal with an unprecedented situation--a steep decline in real estate values at a time when real estate lending has become the biggest activity of the American banking system.

If a regulator does not take into account the perceptions of political officials and members of the industry, then “he is a pretty poor regulator,” said Paul Fritts, the FDIC’s director of supervision. “One of our responsibilities is to keep our ears open.”

But the message to both bankers and examiners was unmistakable: If a loan application is a good one, don’t be afraid to provide the money. And don’t worry if it is a real estate project, even if the lender already has a big portfolio of real estate loans.

Banks and S&Ls; should not turn away a customer “because of the borrower’s particular industry or geographic location,” the regulators said in their joint statement.

“It is possible . . . that some depository institutions may have become overly cautious in their lending practices,” the regulators said. “In some instances this caution has been attributed to concerns on the part of lenders that the regulators of depository institutions are applying excessively rigorous examination standards.”

Regulators also advised bankers to show patience with “borrowers who may be experiencing financial difficulties.”

Many banks have been shrinking themselves to meet tough standards for capital, the amount of money invested in the business by shareholders and owners. For example, an 8% capital standard means that the bank must have $8 of invested funds for every $100 in loans outstanding.

Some businesses have complained that banks are calling in good loans and refusing to make new ones in order to meet higher capital standards. For example, a bank with $8 in capital and $110 in loans would seek to reduce its loan portfolio by $10 to meet the 8% standard.

Paul Fritts of the FDIC said a bank should not hesitate to make a good loan, even if doing so means that it will take longer for the bank to reach the capital standards.

Among specific steps offered by regulators to help lending:

Examiners were reminded to judge a real estate loan’s value on its ability “to generate cash flow over time” rather than its liquidation value--the price that could be received for the property if it was sold immediately.

Regulatory agencies will issue guidelines allowing “loan splitting.” This would enable banks to count as income the partial payments they receive on some troubled loans. The financial regulatory agencies and the Securities and Exchange Commission are developing detailed guidelines.