New York Fed Chief Raps Banks on Bias

William J. McDonough, the president of the Federal Reserve Bank of New York, is taking the industry to task over continuing reports of racial discrimination.

In a speech last week before the New York State Bankers Association, Mr. McDonough lashed out at lending bias caused by either "habit and culture" or "deliberate acts."

"It is discouraging, particularly after all that has been written and discussed, to hear about unfortunately well-documented cases in which loan applications by racial minorities have received rude and unfavorable treatment by bankers, apparently solely for ethnic reasons," he said. "We should all be deeply offended by such behavior."

The address moved Mr. McDonough to the forefront of regulators warning about loan bias.

In recent months, such criticisms had been ebbing. In fact, a recent study by the Federal Reserve Board challenged the notion that banks discriminate.

Mr. McDonough called on banks to boost lending in lower-income neighborhoods - and bankers attending the conference said they took the message to heart.

"Banks need to be reminded of how important this kind of lending is to the community,"said Carol Parry, a managing director of Chemical Banking Corp. "And it's particularly important when a senior regulator emphasizes it."

Herbert E. Knoll Jr., a spokesman for Cleveland-based Keycorp, agreed. "I believe that there remains much to be done, and that there is a regulatory as well as a moral obligation to do more," he said.

But he added that other financial services providers should also contribute to solving the problems of inner-city communities.

"Clearly there are many financial intermediaries that exist who have no burden," Mr. Knoll said. "The problem is immense, and it would be good if there were others contributing to the resolution."

Mr. McDonough urged bankers to visit low-income communities to see the effects of community lending and the efforts of neighborhood organizations.

He said "it is impossible not to be convinced about the breadth of what can be achieved if we work together to develop solutions for the problems confronting us today."

He also appealed to the bottom-line instincts of his listeners.

"There are numerous profit opportunities in poor communities and neighborhoods waiting those surefooted and quick-witted enough to take advantage of them," he said. "By meeting the legitimate credit needs of all communities, including the inner cities, banks can play a vital role in stimulating small business development."

Acknowledging that he might sound like "a bleeding heart," he said, "My heart may bleed, but my head is very hard. We must help the lot of the people in the inner city not only because it is the right thing to do," but also because it will help the economy.

"The challenge of sustaining our communities and neighborhoods ... is a major issue not just for the banking industry but for the whole society," Mr. McDonough said.

And with the banking industry in sound financial condition, it is "in a unique position to play an important role in this process."

Although bankers have expected that the rise of Republicans in Washington will mean a downplaying of community reinvestment, "Mr. McDonough clearly delivered a different message," said Warren W. Traiger, a bank regulatory attorney.

Mr. McDonough encouraged banks to look not just at credit needs, but also at the need for sound business and technical advice for small businesses.

"The large corporations will not pay you much for advice but the small businessman can make it worth your while," he said, noting that it would also be more useful coming from banks that understand business needs than from a government agency.

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