Banking Law

Regulators to Banks: We Want You To Lend, But...

Last month, real estate columnist Steve Brown shot off a nice little rant about how bank regulators were forcing banks to clamp down so hard on real estate lending that they were denying credit to good borrowers as well as bad ones. The Kansas City Business Journal provides further evidence of this phenomenon.

?We want to see institutions lend, but we want to make sure they lend in a safe and sound way with strong underwriting,? said William Ruberry, spokesman for the Office of Thrift Supervision. ?We want them to lend to creditworthy borrowers. Some of the problems we have are related to banks lending to borrowers who couldn?t afford to repay them. It?s why there has been such a rise in delinquencies.?

Having a few problem loans is one thing, but when it gets to the point at which loan-loss provisions start to eat up capital reserves, regulators get concerned.

?Capital is always something we keep a close eye on,? Ruberry said. ?Institutions that have capital issues, if it gets really serious, we can issue a formal enforcement order that will require them to raise additional capital or find a buyer. Sometimes we?ll even say they must do it by a certain date.?

As one OCC attorney told me during the last big banking meltdown, "You can NEVER have too much capital." Well, yes you can. Just ask all bank executives who understand that capital makes money only when it's put to work, bank shareholders staring at anemic ROE, or borrowers who wish banks would start leveraging more of that capital to make some loans.

Outside experts also understand that the pendulum has swung to the side of excess caution.

?Regulators are clamping down on the exams and forcing banks to look much more carefully at who they are lending money to because they don?t want any more problem loans,? said John Blaylock, associate director at Sheshonoff & Co. Investment Banking in Austin, Texas. ?So regulators have been much more attentive to credit issues over the past year, for sure. We don?t know what they?re going to do this year, but I can?t see them easing up on anything. They made it very clear last year that they expect things to be tightened up considerably.?

The sane thing to do during such periods is to batten down the hatches and keep your powder dry. Therefore, calls to increase lending fall on bankers' deaf ears. And speaking of deaf, those politicians and other outsiders who complain about banks "hoarding" the capital they receive from the US Treasury fail to understand the rules of the "banking dance" that the regulators are making banks dance in 2009. The regulators want banks to waltz. Any bank that comes into the house and starts doing a jitterbug is going to get cuffed behind the ear and then thrown out on its ear.

No wonder bankers feel they're snagged on a Catch 22.

To be fair to the regulators, most bankers wouldn't be making risky loans now even if the regulators weren't squeezing them. They're simply afraid of the uncertain future, and you can never underestimate the power of fear in paralyzing bankers. They're human beings, after all, as hard as that might be to imagine. The entire economic outlook is so grim that many bankers would assume the deer-in-a-headlight pose without regulatory prompting. Moreover, in a business as highly regulated as commercial banking, regulatory uncertainty can be as big an impediment to risk-taking of any kind than can economic uncertainty.

Blaylock said community banks are seeking strength right now because there is uncertainty about how the government will react to problems in the market.

?Bankers expect there will be a whole new regulatory system put into place in the near future, and nobody has any idea what it will look like,? Blaylock said. ?So they?re not likely to go out and take risk if they don?t know how it?s going to be interpreted in the regulations down the road.?

It would be "most excellent" if Treasury would announce the rules of the next round of bank rescue measures so that private capital knew enough about the game plan to decide if it was going to play. It would be even "more excellent" if the crusaders in Congress, including those threatening to put banks on a short regulatory leash and "reform the system," would simply get on with it, so people in the system could decide what to do next. Instead, banks have to spend their time restraining their "fists of death" in the presence of second-guessing bank examiners who tsk-tsk loan underwriting decisions made before the Earth's axis was bent, and spending more mind-numbing time gathering statistics on loan modifications so the minority of borrowers who can't or won't pay their loans can get further political support for a bailout of their very own.

Rome burns. Nero fiddles.

Full post as published by Bank Lawyers Blog on February 16, 2009 (boomark / email).