ABA, Seidman Dispute Bush on Credit Crunch

SAN FRANCISCO -- The American Bankers Association on Monday disputed President Bush's view that overzealous bank examinations are the cause of continued tight credit.

In a letter to the White House coinciding with the trade group's annual convention here, the ABA said lack of demand from borrowers has been a bigger factor than examination policies in prolonging what some observers have termed a credit crunch.

Also criticizing the White House's response was L. William Seidman, nearing the end of his term as chairman of the Federal Deposit Insurance Corp.

Though the administration has made a "valiant effort," Mr. Seidman told bankers, Mr. Bush is focusing on the wrong problem. Consumers and companies are too far in debt to borrow any more, he said. The administration should focus on relieving the debt burden, not asking lenders to lay on more.

"If it is a fact your patriotic duty is to make good loans, and I think it is, it must equally be your duty to God and country to not make bad loans," Mr. Seidman said.

The comments came 10 days after President Bush, in a widely publicized meeting with economic advisers, exhorted bank regulators to tell field examiners to take an easier approach to evaluating loans.

In a press conference last Friday, Mr. Bush cited "regulatory excess" and "a lack of confidence" for the paucity of bank loans.

The President's newfound activism on the credit problem made it a principal topic of conversation - and criticism - at the bankers convention.

"We are all out there actively looking for loans," said Richard Kirk, ABA chairman and chairman of United Bank of Denver. "The real issue is finding good loans," Mr. Kirk said.

"Banks want to make loans," added Charles Waterman, chairman of South Holland [Ill.] Trust and Savings Bank. "I don't make a profit by sitting on my money. I have a 50% loan-to-deposit ratio. I would love a 75% ratio."

The U.S. debt burden that accumulated in the 1980s "cannot be sustained, and that is one of the reasons we went into recession," said Sung Won Sohn, chief economist of Norwest Corp., Minneapolis.

Compliance Costs

The ABA's letter also pointed to factors other than demand or bank caution to explain the slowness of recovery.

"Other factors at work both in reducing the ability of banks to lend and in increasing the costs of credit to businesses and households include high regulatory compliance costs, risks to bank officers and directors, unduly lenient bankruptcy laws, environmental lending risks, rising appraisal costs, [competition from nonbanks], and the holding of sterile reserves" at the Federal Reserve," the letter said.

Meanwhile, FDIC Chairman Seidman reiterated his call for tighter regulatory standards on banks' concentration of loans to any one industry. Such standards, he contends, could have alleviated the real estate crisis that has crippled banks and depleted the Bank Insurance Fund.

|Flexibility' Losing Its Glow

He acknowledged to reporters that he has long favored giving regulators the latitude to set concentration limits, but he is having second thoughts.

|I was much more for flexibility in supervision than I am now," Mr. Seidman said. "I was there, and I certainly didn't prophesy these losses."

In his speech on Monday, which was received with a standing ovation, Mr. Seidman said that maintaining the deposit insurance system has become too costly for banks. He prescribed ways to bring down the soaring costs.

"Deposit insurance as presently structured is just too expensive," Mr. Seidman said to enthusiastic applause. "At 23 [cents per $100 of deposits], and possibly an increase to 30 ... the cost is just too large for banks to absorb over the long haul."

Besides limiting lending concentrations, Mr. Seidman said, troubled banks must be seized when they become illiquid; regulators should not wait until capital is exhausted as has been the predominant practice.

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