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The Honolulu Advertiser
Posted on: Wednesday, February 3, 2010

Regulators hurting banks' ability to lend, Geithner says

By Kevin G. Hall
McClatchy-Tribune News Service

WASHINGTON Over-zealous bank regulators and an attempt by Congress to punish greedy bank executives are combining to restrict the ability of the nation's 8,000 community banks to lend to small businesses, Treasury Secretary Timothy Geithner said yesterday.

Called to testify before the Senate Finance Committee about the Obama administration's fiscal 2011 budget proposal, Geithner instead spent much of his time discussing why lending hasn't picked up at community banks, often the only lender to small-town America.

"Where is the urgency, Mr. Secretary, in solving this?" Sen. Maria Cantwell, D-Wash., demanded of Geithner. "People put the screws to the community banks and gave all the money to the big banks. I'm telling you they are coming into my office every day with these stories, so I would urge you ... to act now and not wait for legislation."

Sen. Bill Nelson, D-Fla., said he's hearing "cries of anguish" from small businessmen who can't get loans and must close. Sen. Jim Bunning, R-Ky., angrily described how small banks in his state are being hamstrung.

"It's the (federal) regulators that have stopped the flow of money out of the community banks to the small-business person, for fear of the (federal) regulators coming in and consuming the bank," Bunning said. "They're stopping all lending to the people who absolutely need the lending."

Geithner acknowledged that federal bank regulators who fell down on the job before the crisis now want to appear tough.

"They are now overcorrecting and they're making it hard for them (community banks) to make new loans," said Geithner, adding that he's hearing complaints, too.

Correcting the problem, he cautioned, is difficult because bank regulators are independent agencies that don't take orders from the Treasury Department.

Bank regulators also have demanded that lenders set aside higher capital reserves to cover potential losses. Insufficient capital on hand to cover outstanding loans was an important contributing factor to the financial crisis. The higher capital-to-loan ratio was needed, but carries consequences.

"What they (small banks) did was basically they started canceling loans to individual businesses. That's how they got the capital ratios to come back," Cantwell said.

Chris Cole, the senior regulatory counsel for the Independent Community Bankers of America, which boasts nearly 5,000 member banks, said there are many disincentives to lend because of tougher regulation.

"It's the fact that the regulators are coming in with sort of unofficial capital requirements that are higher than the minimums now required, making banks raise more capital. They're coming in with arbitrary thresholds with respect to loan loss reserves," he said.

Geithner politely suggested that congressional posturing has played a role, too. Many community banks technically, lenders with assets below $10 billion qualified for federal bank bailout funds. Geithner aide Gene Sperling, however, said that 600 community banks withdrew their applications after they saw Congress change the rules.

Lawmakers, angry that many big banks had given or would give large bonuses, demanded changes in the Troubled Asset Relief Program that included tough compensation restrictions as a new condition for receiving bailout funds. Many small banks balked.