Brady Exhorts Bank Examiners to Aid Economy

Treasury Secretary Nicholas F. Brady warned federal bank examiners Monday that critical scrutiny of real estate loans could choke economic expansion, and he exhorted them to help “inspire confidence” among bankers to make more loans.

In an unusual meeting with nearly 500 bank examiners, Brady and other top Bush Administration officials told the regulators to look beyond reviews at a particular bank and to consider the perils to the economy from overzealous regulation.

It was a tough and coordinated message from the Administration, which is fearful that the persistent “credit crunch” is threatening to throw the economy back into recession.

“If America’s banks are the engines for growth in this country, then you are at once the throttle and the governor,” Brady told a meeting of top regulators from the four federal agencies that oversee banks and thrifts.

One official after another stepped to the microphone in the ballroom of the Omni Hotel to appeal to examiners to help improve the business climate by taking a more optimistic view of prospects for commercial real estate.

“We’re all in this together,” said Michael J. Boskin, chairman of the President’s Council of Economic Advisers. “We need a healthy, growing American economy.” He said the banking system “has been in a state of paralysis.”

In judging real estate loans, the Administration wants examiners to consider not only a property’s current value but its potential. Otherwise, in many instances, examiners will be forcing banks to take drastic write-downs on real estate loans. This in turn will lead to banks setting aside large amounts of money to cover losses, reducing the funds available for lending.

“Why rigidly condemn or criticize the renewal of even troubled real estate loans if the only alternative is foreclosure, total loss and additional burdens on already distressed markets?” asked Deputy Treasury Secretary John E. Robson.

“And it makes sense for examiners not to assume doomsday scenarios in evaluating loans,” he said. “Our troubled economy will turn around and so will troubled (real estate credits).”

The examiners, supervisors of thousands of field auditors throughout the country, sat mostly stony-faced.

They were summoned to the special meeting to discuss guidelines issued by their agencies for reviewing loans on commercial real estate. The industry has been plagued by a glut of office space, leading to a vacancy rate of 20%. Several geographic markets have suffered even higher rates.

The Administration urged examiners in March and October to take a more lenient attitude when considering the viability of troubled real estate loans. And last month new guidelines were promulgated by the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp., the Federal Reserve Board and the Office of Thrift Supervision.

All of the agencies and their examiners should be “singing from the same sheet of music,” Robson said at a news conference after the opening session of the examiners’ meeting.

An appeal to the examiners was also made by Robert Larson, president of Taubman Co., an operator of shopping malls and department stores. “It’s time for all of us to roll up our sleeves and contribute to fixing economic conditions,” said Larson, a member of the oversight board of the Resolution Trust Corp., the federal agency responsible for closing nearly 600 defunct S&Ls; and disposing of their assets.

The examiners will meet again today in closed-door workshops to discuss the new regulations calling for a more optimistic consideration of real estate.

However, the prospect of a considerable easing of examination standards seems unlikely from the independent-minded field regulators. Many have grumbled privately about potential political influence in their jobs.

Others are concerned about the rough treatment of Comptroller of the Currency Robert L. Clarke, who was recently denied confirmation for a second term by the Senate Banking Committee. He was widely criticized for alleged lax regulation of troubled banks in recent years.

Robson said examiners should not be deterred by “the gross injustice done to Bob Clarke.”

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