NEWS ANALYSIS : Bush Effort to Boost Credit May Have Little Impact

Concerned by increasing thrift and bank failures, the President and Congress gave federal regulators stern orders in August, 1989: Keep a close and skeptical watch on banks and savings and loan associations.

“You wouldn’t lose your job for being too tough, but if you were too easy, you damn sure could risk being called before a congressional committee investigating some bank or S&L; failure,” said one former regulator Wednesday in recalling the atmosphere after the passage of the S&L; rescue bill 25 months ago.

Fast-forward to October, 1991. President Bush is now telling examiners to lighten up on financial institutions. The reason is to ease a credit crunch by encouraging banks to make more loans to businesses and jump-start the stalled economy.

Specifically, Bush is instituting measures that would restrain regulators. Federal regulators will adopt a streamlined appeals process, allowing bankers to complain about examinations directly to supervisors in Washington. Also, examiners will be encouraged to cast a more benign eye on real estate loan prospects by placing more emphasis on the income-producing potential of a property rather than current market value.

It’s highly uncertain whether this about-face policy will work, given the skepticism of thousands of examiners in the field and the perilous state of a real estate market, which is littered with thousands of half-empty buildings.

There is some belief that the Bush proposal has higher political value--coming as the President faces a 1992 election campaign--than economic merit. For some, the credit crunch--if it exists at all--is not caused by too-strict regulation but rather by the recent recession.

“Banks are suffering significant losses because of their lending policies in the past,” said Fritz Elmendorf of the Consumer Bankers Assn., which represents anumber of major institutions. “They are just being careful, and they should be careful. There is largely a lack of loan demand. We don’t see examiners as the key to the recovery.”

The best the Administration is likely to achieve is an “impact on the psychology of the examiners so they feel secure” in taking a more optimistic view of real estate loans, said Kenneth Guenther, executive director of the Independent Bankers Assn. of America.

“The climate can be a terribly important thing,” he said. “The message to a young examiner going into a small bank in California is: ‘You will not be the judge, jury and executioner.’ The pendulum has swung too far, and the President is trying to nudge it back to the middle.”

But even a new attitude among examiners may not be enough to deal with a “tremendous” surplus of commercial real estate, Guenther admitted. Many of the nation’s biggest cities have office vacancy rates in excess of 20%. Federal regulators are trying to dispose of more than $50 billion in real estate obtained from failed institutions.

Even among members of the business community who argued strongly for a change in policy, there is deep skepticism that the situation will change dramatically, with banks suddenly unleashing a torrent of loans for credit-hungry businesses.

“This is a very strong change in signals--the President is trying to make darn sure that regulatory oversight is balanced,” said Barry Rogstad, president of the American Business Conference, an association of high-growth firms whose members met recently with Treasury Secretary Nicholas F. Brady to complain about scarcity of credit.

But Rogstad said he is worried that both examiners and bankers themselves “have become extraordinarily conservative. There is a risk-averse mind set these days.”

Charles F. Byrd, a Washington attorney for banks and S&Ls;, is hopeful that bankers will be less fearful of regulators, but he is dubious that they will open the credit spigots wide. “Considering the surplus of commercial real estate in so many markets, I doubt if banks will rush out to make commercial real estate loans.”

Whether the new policy will work is “a crap shoot,” Byrd said. “Bankers are saying they don’t have a lot of people coming in and asking for loans.”

Top officials recognize that changing the regulatory mood can help, but won’t be decisive for the recovery of a troubled economy.

“We don’t think this (the new guidelines for examiners) will sop up the oversupply of real estate,” Deputy Treasury Secretary John Robson said. “That’s up to the economy. But we want to be sure the regulatory process is not a retardant.”

Others say bankers will only begin making more loans when they have confidence in the borrowers and faith in the general economy.

As L. William Seidman, who departs this month as chairman of the Federal Deposit Insurance Corp. reminded the American Bankers Assn. convention this week: “If it is a fact your patriotic duty is to make good loans, and I think it is, it must equally be your duty to God and country not to make bad loans.”