Bank Regulation to Be Eased to Spur Economy : Finance: Bush moves to counter a shortage of credit. Changes ordered in way real estate loans are scrutinized.

The Bush Administration, fearful that a credit crunch is hampering the economic recovery, announced Tuesday that federal regulatory agencies will ease their scrutiny of banks in an unusual effort to stimulate new lending and the economy.

“With mortgage interest rates at their lowest levels since 1977, I want to ensure that we have sound banks making sound loans,” President Bush said after a meeting with his Economic Policy Council.

To ease the so-called credit crunch--in which even creditworthy borrowers cannot get loans--the regulatory agencies will encourage bankers upset with the actions of field examiners to appeal to Washington supervisors.

And new guidelines will be issued for the review of real estate loans, directing examiners to consider the long-range value of a property, rather than its current depressed price. The proposals would also provide financing methods to expand the pool of capital for banks.

“We’re trying to do everything an administration can to assist an economy that we think is moving out” of recession, the President told reporters at the White House.

Bush’s actions reflect the Administration’s deep concern about the economy’s poor performance at the outset of the 1992 presidential election campaign. The Administration is trying the regulatory approach because monetary policy seems to have been largely ineffectual--the Federal Reserve is driving down interest rates, but lending is still stubbornly tight.

Although the initiative was praised by some executives of the beleaguered banking industry, some bank analysts were skeptical that it would lead to much new lending. Some analysts fear that a relaxation of regulatory oversight could worsen the problems of banks.

“Any time the government has allowed depository institutions to circumvent examiners in the field, disaster has followed,” said Paul Getman, senior economist at Regional Financial Associates, an economic consulting firm.

The banking industry has blamed regulators for the credit shortage, saying their institutions are being forced to write off risky real estate loans, even some still being paid back on schedule. The losses on real estate cut into a bank’s capital, reducing its ability to make new loans or renew old ones.

But regulators have argued that the fall in lending is related to the economy. L. William Seidman, chairman of the Federal Deposit Insurance Corp., said this week that the demand for loans is down because of the recession and heavy debt loads now carried by many corporations.

However, Bush said that it is important that businesses have access to funds for expansion. “Ensuring sound credit for economic expansion, which creates new jobs, is important,” he said.

Bank analysts said the revisions amounted to modest changes in a credit-stimulating package announced by the Administration earlier this year.

“This is pretty thin gruel,” said Robert Litan, a banking expert at the Brookings Institution. “Changing the attitudes of bank examiners is like trying to change an oil tanker in midstream. It takes a long time, and these examiners have long memories.”

The financial regulatory agencies issued a joint statement in March advising their 7,000 field personnel to take a moderate approach in considering the value of real estate loans. But the message of leniency apparently did not get through.

The President has now put his personal stamp on the issue, and the regulatory agencies will respond with specific directives within the next few weeks, including new guidelines calling for a more upbeat view of the prospects for commercial real estate.

Bank industry executives, who have been lobbying for some regulatory relief, welcomed Bush’s proposal. “We’re delighted to see he has moved so firmly and aggressively to address these issues,” said Donald G. Ogilvie, executive vice president of the American Bankers Assn. “We think he is going in exactly the right direction.”

Under the new directives, bankers who want to challenge an examiner’s action will be able to take their complaints to FDIC officials in Washington or to the Office of the Comptroller of the Currency. The process is designed to ease fears of retaliation by local examiners.

“We have no evidence that examiners threatened retaliation” against bankers who disputed their findings, said Susan Krause, deputy comptroller of the currency. But the bankers “fear stepping forward because the same man or woman will come back next year,” she said.

The unifying theme of Tuesday’s presentation was a clear message to bankers and examiners to cooperate in making loans easier to get.

“Bankers and examiners should not lump all real estate together: Distinctions should be made,” the Treasury said in a detailed fact sheet on the Administration plan. “For example, credit for a residential builder should not be automatically penalized by local oversupply conditions in commercial office development.”

The Administration plan would also permit banks to expand their lending capacity through the sale of additional shares of preferred stock.

The President’s announcement followed a meeting of his Cabinet-level Economic Policy Council, which gathered for the third time in two weeks to weigh possible solutions to the problems facing a still-stagnant economy.

Treasury Secretary Nicholas F. Brady presented the plan to Bush during an hourlong session in the White House Cabinet Room. Among others present at the meeting were Commerce Secretary Robert A. Mosbacher, Labor Secretary Lynn Martin, Secretary of Housing and Urban Development Jack Kemp and White House Chief of Staff John H. Sununu.

The President said his Economic Policy Council will consider “additional measures that might be taken--not only to relieve the credit crunch but also to advance our agenda for job creation and growth. We will be meeting to review additional recommendations in the weeks ahead.”

BACKGROUND

For nearly a year, bankers and businessmen have complained about a credit shortage brought on by tight regulation in the midst of a recession. Bank regulatory agencies in March issued guidelines to ease the situation, but loans remain difficult to get. Now, the Administration has ordered the regulatory agencies to direct their 7,000 field examiners to take a more relaxed view of the value of real estate loans. Bankers will be permitted to take their complaints about tough examinations directly to Washington.