Brady to Examiners: Use More Discretion

BALTIMORE - In his latest effort to restore the confidence of bank examiners and the flow of credit, Treasury Secretary Nicholas Brady exhorted examiners on Monday to rely more on their own judgment and less on financial analysis when evaluating real estate credits.

"Judgment and experience are the key to bank regulation," Mr. Brady told 465 supervisors from the four federal bank and thrift agencies who gathered here for a discussion of their part in what many observers have characterized as a credit crunch.

Clarke: |Be Reasonable'

The message to examiners from Mr. Brady and other key administration officials was to ease up - though no one used those words - in the context of sound regulation.

"Nobody is saying ease up," Comptroller of the Currency Robert L. Clarke said after the meeting. "What we are saying is, be reasonable."

"You need to have the courage to use your own judgment," Deputy Treasury Secretary John Robson told the gathering. "Nothing requires you to compromise your principles."

Similar messages - defending regulatory judgment and absolving examiners of blame for a credit crunch or recession - were delivered by Michael Boskin, chairman of the President's Council of Economic Advisers, and Robert C. Larson, chief executive officer of the Taubman Companies, representing the Resolution Trust Corp. Oversight Board.

Top officials of the Federal Reserve Board, Federal Deposit Insurance Corp., Office of the Comptroller of the Currency, and Office of Thrift Supervision attended, and Fed Chairman Alan Greenspan appeared for a short time.

A Silent Audience

But it was clear that the visiting examiners have been scarred by criticism and perhaps confused about how they should be assessing troubled institutions and loans. Not one examiner asked a question during the public portion of the meeting.

The meeting was called as part of the administration's series of initiatives to loosen credit and spur an economic recovery. Senior examiners from across the country converged on Baltimore for the two-day event.

"Whatever happened to the |character loan' that built this country?" Mr. Brady asked. He was referring to the type of loan that a banker would make based on his knowledge and estimation of the borrower.

He suggested that examiners may have been too quick to seek a negative classification on character loans.

"If a bank made such a loan and time was needed to provide repayment, would you, the examiner, give the borrower the benefit of the doubt?"

No Fear of Punishment

Mr. Brady and others assured examiners that they would not be punished if they used reasonable judgment - even if it later proved wrong.

But those assurances may have rung hollow for some examiners, particularly those who work for the Office of the Comptroller of the Currency.

The comptroller, Mr. Clarke, was recently denied a second term because lawmakers said he was too lenient.

Mr. Clarke admitted as much: "My message to them was don't let this [rejection] throw you off course. I can say that until the world looks flat, but it makes it pretty hard when they see what happened [to me]. When your judgment gets questioned, it's not a pretty picture."

In addition to the discouraging message sent by Mr. Clarke's defeat, Congress passed legislation last month that requires bank examiners to crack down even harder. The bill instructed the agencies to take progressively severe action against banks as capital declines, and it even tells regulators to set underwriting standards for real estate loans.

"Do not fall prey to the mixed messages such as the gross injustice done to Bob Clarke or the misguided |mark everything to market'" policy supported by the General Accounting Office of Congress, said Mr. Robson, the No. 2 official at Treasury.

Mr. Robson spoke of a "multiplier effect" - one misstep by regulators being compounded as word of it spreads through the system.

Looking Beyond Collateral

Mr. Robson promised that recent credit-easing steps are permanent improvements. For example, the value of real estate to be based more on a borrower's ability to repay and a property's income-producing capacity, and not solely on value of collateral.

In Washington, the Shadow Financial Regulatory Committee, which follows and criticizes official policies, attacked the Bush administration for promoting lenient standards that could lead to more failures later, Reuters reported.

"We object to attempts to use bank supervisory policy as a means of influencing macroeconomic activity," said the group, mostly academic economists.

Gonzalez Fumes

Meanwhile, House Banking Committee Chairman Henry B. Gonzalez, angry that his staff was excluded from the Baltimore conference, asked the federal bank and thrift examiners to appear before his committee Jan. 3 to explain what he called "thinly disguised efforts to intimidate examiners."

"I have made no secret of my concern that the National Examiners Conference is an extension of what seems to be a concerted effort on the part of the administration to make examiners the scapegoats for the so-called credit crunch," Rep. Gonzalez, D-Tex., said in a letter to T. Timothy Ryan, director of the Office of Thrift Supervision, which coordinated the meeting.

Mr. Gonzalez asked for copies of all memoranda, correspondence, and other communications with the White House and other agencies regarding examination policies.

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