Mixed Regulatory Messages Slowing Community Bank Lending

The newspapers report that the chief banking regulators are urging banks to lend money. But the front-line bank examiners, the men and women who work face to face with actual bankers, are giving different orders. They are telling banks to build up capital and liquidity, which can only be done by SLOWING lending.

The Wall Street Journal reports the phenomenon with this quote:

"It's so incongruous when the four regulators publish a joint press release imploring banks to lend and saying they should do their duty under their charter, when at the same time the regulatory field forces are bludgeoning community banks to death," said Camden Fine, chief executive of the Independent Community Bankers of America.

I'm a skeptical guy, and I read quotes like that and wonder if it's just political posturing. However, this fall I've talked to dozens of bankers. I've spoken to three conferences of bank associations and met with the top executives and directors of several other banks. I'm hearing conclusively that their regulators want them to build up capital and liquidity, even if that means cutting back on lending.

The pronouncements of the top regulatory dogs don't match the behavior of the regulatory pack dogs.

This is important, because if regular Main Street businesses, (NOT involved in real estate development) are suddenly cut off from the capital they are used to having, then the recession becomes deeper and lasts longer.

Comments

[John Lounsbury:]

Dr. Conerly - - -

Interesting notes on what you have personally observed. There are also reports of several of the big banks that have received TARP funds making investments, in amounts constituting a significant portion of the TARP infusions, in acquistion investments rather than making loans. What you have reported makes one wonder if my recent complaint about the lack of a plan in all this might even have been an understatement. Could there actually be a plan of deception? Or is all this a case of the right hand not knowing what the left hand is doing?

I have just submitted two articles to SA that discuss an overview of what might be going on in banking back rooms. (They are entitled "The Banker's Dilemma" and "The Banker's Choice" as submitted, but SA editors sometimes change my titles when publishing.) What you have described in this article reinforces my speculations.

2008 Dec 27 10:57 PM

[Jan VanDenB...:]

I think this is happening, except on the FHA front.

I just had the buttend of WaMu, which holds my commercial loan of $2.9 mn, assumable, that if I want to sell my property, the buyer must come in at 40% down.

This is for a solid, cashflowing property whose value has GONE UP during the credit crisis due to the fact that the closest thing to government bonds in safe income in a recession is a well-located affordable apartment complex.

Now, if you're not into commercial property, you may not know what a STUPID requirement like that does, but I can tell you that it cost me at least $200,000 that instant.

These geniuses are destroying the value of their own collateral.

This problem needs fixed.

Jan VanDenBerg

2008 Dec 28 04:06 PM