Creating jobs is to the Clinton administration what booking loans is to the nation's commercial banks: the path to prosperity. Demonstrating its understanding of banks' central role in our market economy, the administration asked bank and thrift regulators to take steps to increase credit availability and reduce regulation.

On March 10 the four agencies released their "Interagency Policy Statement on Credit Availability," with special attention to the credit availability problems of small and medium-size businesses.

The statement includes five categories of regulatory and administrative changes agreed to in principle by the regulators: eliminating impediments to loans to small and midsize businesses, reducing the appraisal burden, enhancing and streamlining the examination appeals process, and improving the examination process.

Standards for Best Banks

A further joint policy statement on March 30 detailed changes to loan documentation requirements for highly rated banks.

Regulatory relief will regress into rhetoric if the section on examination appeals is not changed to provide for an independent appeal process.

Top industry trade groups have already testified before a House subcommittee that the administration's program will not work until examiners in the field know that Congress is backing the intent and substance of the new program.

To that end, industry trade groups have indicated that they support HR 962, the Economic Growth and Regulatory Paperwork Reduction Act.

In their zeal to reform the banking industry, Congress and the administration must not underestimate the power of the regulatory process.

Comfort Zone

Reducing paperwork and other impediments to small-business and character lending, such as using real estate appraisals in a reasonable manner or authorizing a "bucket" of character loans, will not give bankers the comfort they need to authorize a meaningful increase in credit availability unless an independent, efficient, and recrimination-free examination appeals process is created.

Whether such a process is created through legislation or regulation is irrelevant. The fact remains that it needs to be created.

Bankers' ability to make loans has been so severely limited by federal legislation, and bank regulators have such an impressive array of regulatory weapons to constrain that ability, that banks, especially community and regional banks, generally do not have the resources to stand up to wrong or simply misguided decisions by field examiners and their supervisors.

When Judgments Clash

Take the case of a hypothetical small-business loan that a banker wants to make based, in part, on the borrower's character and integrity. Such a loan might have been classified before the new program as other assets especially mentioned, or OAEM.

Under the new program, if such loans are not grouped with classified loans, an examiner could instead classify a character loan as substandard merely by substituting his or her own subjective view of the borrower. The substandard classification, of course, carries with it the need to reserve against the loan and, potentially, to increase the bank's reserve for loan losses.

Faulty Reward System

Quite simply, examiners are generally not going to risk their careers to support the latest program coming out of the executive branch.

With this perspective, it is not hard to understand (though easy to abhor) the inevitable conservatism of the field examiner. Few examiners have been criticized or demoted for being too tough.

Another point supporting the need for an independent appeals process is found in the policy statement text: Each agency will take appropriate steps to ensure that its appeals process is "fair and effective." Obviously, appealing an examiner's decision to the same agency involves a conflict of interest.

Supervisors in the federal banking agencies are often not willing to overturn examination complaints, even if they privately acknowledge a mistake, because of their fear that other government agencies, such as the General Accounting Office, will use the record of examination mistakes to criticize the agency's exam process.

It is not unknown for complaints to languish in the agency review process -- never to be seen, heard, or ruled on again.

Reluctance to Overturn

Moreover, supervisors generally overturn field decisions only under exceptional circumstances. And those exceptions are usually claimed by the most sophisticated and resource-rich complainants. Most regional and community banks cannot or will not complain, sacrificing principle for pragmatism.

The interagency policy statement proposes that agencies review their complaint processes to improve the scrutiny of complaints and the timeliness of responses.

As an opportunity to move the grudging regulatory process forward, to reduce inapproporiate micromanagement and increase credit availability, to let bankers make good credit decisions and examiners make objective and relevant portfolio reviews, the examination appeals process should include at least these elements:

* The appeal should be heard only by persons mutually acceptable to the bank and the agency (such as retired judges, retired bankers, former examiners, and the like).

* The appeal should be heard within 60 days of a written request by the bank, and a decision given within 30 days of the hearing.

* The losing party should pay the prevailing party's reasonable costs and expenses in pressing the appeal.

* To avoid loss to the federal deposit insurance fund this process should not be available to critically undercapitalized institutions.

Few people believe in, nor am I advocating, a return to the loose standards and self-dealing that pervaded some financial institutions in the 1980s.

Bankers need to know that they can exercise their best judgment, tempered by experience, and not have their reasonable business decisions challenged arbitrarily. Examiners need to know that there is a reasonable check on their behavior.

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