Banking Law

At a Congressional hearing today (paid subscription required), federal bank regulators reluctantly confirmed what we (and many bankers) have been complaining about for months (most recently, here and here): bank regulators are sending conflicting signals to banks about lending. The popular line is that banks are greedily scarfing up TARP money, then sitting on it for no good reason other than fear and/or greed, instead of lending it to deserving borrowers, who, in turn, would use it to take in  a movie, fill their pie hole, buy some crack or a lap dance, or otherwise grease the wheels of commerce. Regulators have publicly urged banks to increase their lending "to creditworthy borrowers, consistent with safe and sound underwriting principles." You know the drill.

Under prodding from various Congresspersons, banking regulators owned up the fact that what banks have been hearing amounts to (in the words of an American Banker headline) "Regulatory Dissonance."



Though federal regulators acknowledged they were partly responsible for mixed messages sent to banks ? "increase your lending, tighten your loan standards" ? they continued to send them at a House hearing Wednesday.

With lawmakers also shouldering some of the blame, regulators contradicted each other ? and, at times, themselves ? about what they were asking of banks.

Timothy Long, the chief national bank examiner in the Office of the Comptroller of the Currency, insisted that his agency is not reining in lending standards excessively but at the same time called those standards too lax.

"We have not told our examiners to crack down on banks," he said. "They are obviously more sensitive to problem assets and loan portfolios."

It's great the way a regulator will stand up and flat out admit they might have screwed up without trying to waffle, isn't it? In Long's defense, last week he had to sit before a Senate committee and be excoriated by mental heavyweights in that august body about how lax the OCC was in forcing tight risk management practices on banks under its supervision. He had to swear that the OCC was cracking down on the lax underwriting practices of national banks to mollify the yapping interlocutors at that gabfest. The next week he has to listen to the likes of Barney Frank badger him for being too strict on banks. It's enough to give a regulator "Congressional Dissonance."

During the hearing, Frank asked regulators whether banker complaints of a crackdown had merit. At least one, Scott Polakoff, the acting director of the Office of Thrift Supervision, said bankers are right.

"There is an element of truth to that," he said. "What we have to do here is improve our communication. There are a number of mixed messages here."

The OCC's Long denied there is a crackdown but said regulators have reason to be concerned.

"I don't think we have ever gone into an economic downturn with the kind of commercial real estate concentrations like we have now," he said. "Naturally our examiners are focused on that."

Not only a waffle, but a whole wheat waffle with plenty of butter and syrup on it.

Texas Democrat Al Green had some fun with Mr. Long's reluctance to own up to the fact that his agency's been speaking with a forked tongue. Texans are master pimpers and Al's no exception.

Rep. Al Green, D-Texas, said he is concerned that creditworthy borrowers are being shunned. After asking the regulators to raise their hands if they agreed, two ? Federal Reserve Board Gov. Betsy Duke and the OTS' Polakoff ? raised them.

Noticing that the OCC's Long kept his hand down, Green asked him to defend the claim that creditworthy borrowers are not being denied loans.

"In talking to bankers, I ask bankers point-blank if they are [giving loans] to creditworthy borrowers, and everyone is telling me, 'Yes, we are,' " Long responded.

But after Green pressed the point, Long acknowledged that in some sectors securitization is shut down and that banks with heavy concentrations in certain areas have stopped lending.

Green appeared satisfied. "Mr. Long, you and I are having a kumbaya moment," he said.

I'm convinced that Tim would have thought while that song had a nice melody, you just couldn't dance to the beat. It's a great song to accompany standing around in a useless circle holding hands, after ingesting mushroom caps, though, so Big Al was right on the money with a musical reference that's perfect for any Congressional hearing.

At least Barney shouldered some of the blame, although his shoulders are awfully small.

"We do tell the regulators two things: Tell people to make loans; tell people not to make loans," he said. "They are not supposed to be the same loans, but there is this tension here."

But the Massachusetts Democrat said lenders have to find a way to start lending again and said this could happen even while keeping the system protected.

"In normal times, the role of the regulators is to make sure the bad loans aren't made ? , but we are not in normal times right now," he said. "We are in times where there is a clear problem with making good loans."

We're also in times where there's a clear problem with making good public policy. How about taking the first step in the right direction, Barney, and resign?