To the Editor:

Acting Comptroller of the Currency Julie Williams and former Comptroller Eugene A. Ludwig have warned that if the economy slows down, some banks may not be prepared. National bank examiners have found loosened underwriting standards, rates that do not reflect the riskiness of loans, and inadequate collateral behind some loans.

I have no doubt that these warnings are timely and appropriate. I believe, as apparently do Ms. Williams and Mr. Ludwig, that part of the mission of the Comptroller's Office is to give timely warnings of trends in the banking industry that may result in unanticipated losses or even worse, bank failures.

However, experience is also a good teacher. Those of us whose clients experienced the recession of the late '80s - and that included bank borrowers, banks and S&Ls, and directors and officers of financial institutions - can tell you that regulatory warnings are taken very seriously by the banking industry.

In fact, there is often an overreaction, as I believe there was in the late '80s. Regulatory warnings are interpreted by bank examiners in the field as directives to "classify" certain types of loans. That overreaction can lead to a credit crunch in which good loans and bad loans are treated identically, and well-conceived projects are not funded or not renewed.

In the late '80s the credit crunch came in the real estate area. Today it is already occurring with respect to foreign lending. The regulators are also on a mission to curb subprime lending. Commercial real estate lending is also getting closer scrutiny by the regulators and their field examiners.

Bank credit is the lifeblood of our economy. Cutting off credit is the fastest way to a recession.

I am not saying that the bank regulators should stop issuing credit warnings to the banking industry. In most cases, like the present, I believe those warnings are deserved. However, a more nuanced message must be conveyed, particularly to the field-level examiner, that lending should not be cut off or even curtailed.

In a difficult lending environment, a bank may have to set aside larger reserves to cover potentially greater loan losses. A loan may require additional collateral; rates may have to be adjusted upward. But bankers should avoid cutting off credit, unless that is the only prudent course of action.

Similarly, certain industries, such as commercial real estate, should not be blacklisted. In my view, this is just good business. Banks should not be fair-weather friends.

Ronald R. Glancz

Partner,Venable, Baetjer, Howard & Civiletti LLPWashington

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