Federal Regulators Try to Reassure Banks on Riot Aid

Banks and thrifts that give a break to borrowers hurt by the Los Angeles riots will not be penalized by bank examiners as long as they do it safely, the four major federal bank regulatory agencies said Tuesday in a joint statement.

The statement by the Federal Reserve Board, the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency and the Office of Thrift Supervision is an outgrowth of a meeting last Friday in Los Angeles between regulators led by Treasury Secretary Nicholas F. Brady and California bank and thrift executives.

The statement did not go into specific detail, saying only that banks or thrifts that restructure the debt of their borrowers hurt in the riots or that extend repayment terms will not be criticized by examiners if it is “carried out in a prudent manner.”

That drew criticism from bank and thrift executives, who complained that the statement is too vague and open to a range of interpretation over what kind of breathing room given to borrowers would be considered safe and prudent.

Jay Janis, president of the California League of Savings Institutions, suggested that regulators be more specific and say that institutions will not be forced to “classify” loans made to riot-damaged borrowers, an action that typically requires institutions to set aside money to cover losses and forces them to apply payments toward a loan’s principal rather than counting it as income.

California banks and thrifts have three concerns that they believe could inhibit their ability to assist borrowers hurt by the rioting and to finance rebuilding.

First, small institutions could suffer crippling losses if regulators force them to set aside money to cover losses on loans to businesses hurt by the riots.

Second, banks and thrifts are concerned that regulators will consider as “risky” loans made to businesses planning to rebuild, because many of those businesses have no income coming in until they reopen.

Third, under current federal laws, thrifts are discouraged from making the kind of commercial loans that could help the rebuilding.