WASHINGTON - Overzealous regulation resulted in bank capital standards so tough that they choked off business credit, a Federal Reserve Bank president said last week.
Boston Fed President Richard F. Syron told a House committee on Thursday that both Congress and regulators overreacted to the savings and loan crisis of the 1980s and put too great a burden on banks.
"The bottom line can be summed up in a couple of points: the pendulum swinging too far, single minded policies in some cases, and - as the old saying goes - timing is everything in life and timing is everything even in economics," he said.
Echoing Capitol Critics
Sounding like many Washington critics of policies that created a purported credit crunch, Mr. Syron expressed particular concern about regualtors' current emphasis on the leverage capital ratio - 4% of assets for most banks. He said regulators should drop the requirement eventually.
"Once interest rate risk has been incorporated into the risk-related ratios, the leverage ratio should be eliminated," he said.
One Less Requirement?
Mr. Syron's comments to the House Small Business Committee are likely to maintain pressure on federal regulators, who have said they plan to phase out the leverage requirement once interest rate risk is incorporated into risk-based capital standards.
The agencies are expected to adopt final rules on interest risk by early next year.
The Boston Fed president said the leverage limit created unforeseen problems. Because regulators set higher leverage ratios for banks as loan problems worsen, lending has retreated with the economy, he said.
As a result, bank lending has not had the stimulative effect that official sought to revive economic growth.
Looking to the Future
"Increasing the ratios in response to actual losses creates a procyclical problem," Mr. Syron said. "I believe the target should be based on future risks, rather than on realized losses."
For many institutions in New England, Mr. Syron said, the leverage ratio is so high that it has made the risk-based standards irrelevant.
"In my view, the better approach would be to determine the appropriate risk-based capital ratios for institutions ahead of time and then stick to them," he said.
Mr. Syron also voiced cautious support for legislation sponsored by Rep. Joseph P. Kennedy 2d, D-Mass., that would temporarily reduce the leverage ratio to 3%. Mr. Syron carefully avoided an outright endorsement of Rep. Kennedy's measure, saying he had not read the bill.
"I support what he's trying to accomplish," Mr. Syron said.
A Lending Stimulus?
The bill could increase loan volume at New England banks by more than $20 billion, according to Rep. Kennedy. "Bank capital standards are clearly a problem that have exacerbated the credit crunch in New England and across the country," he said.
Congressional leaders at Thursday's hearing were quick to echo Mr. Syron's sentiments.
"The pendulum has swung much too far," said Rep. John LaFalce, D-N.Y., chairman of the Small Business Committee. "The single-minded preoccupation with capital levels that characterizes much recent policy has rendered our banks and thrifts incapable of fulfilling their lending functions," he added.
"You can't do things overnight," Rep. LaFalce said. "That was the policy of the administration, and that was the policy of the Congress. And it continues to be. We're trying to bring some rationality to this process."