WASHINGTON — Federal regulators are expected today to unveil guidelines designed to encourage bankers to lend more freely, but critics are already saying the move will not prevent the credit crisis from worsening.
The guidelines are expected to avoid placing any new mandates on the industry, instead laying out what activities regulators expect banks to be engaging in. According to sources familiar with the guidelines, these expectations are broadly worded and include an outline of general principles of good banking.
For example, the guidelines encourage banks to lend to creditworthy borrowers, avoid restricting underwriting standards too much, and ensure compensation packages do not create perverse economic incentives.
But without a specific requirement that banks lend money — even with funds granted to them through the Treasury's capital program — it is unlikely the guidelines will have much effect on bankers, analysts said.
"They can be cheerleaders for lending all they want, but until there is confidence people are going to keep their jobs and" banks will keep "their resources on the funding side, I don't think cheerleading is going to have much of an impact," said Gil Schwartz, a partner at Schwartz & Ballen LLP.
The regulatory guidance comes as greater clarity is sought for purposes of the Troubled Asset Relief Program. Treasury Secretary Henry Paulson is scheduled to hold a press conference on the program today, and the Senate Banking Committee has scheduled a hearing Thursday on its implementation. The House Financial Services Committee is expected to follow suit in a Nov. 18 hearing.
The purpose of the press conference was unclear, but some sources speculated that the Treasury would announce it intends to buy equity stakes in life insurance companies. Until now, the injections have been limited to banks and thrifts.
Lawmakers have argued that recipients of capital injections should be required to lend the money, but bankers have complained about the program's lack of clarity and fears that more strings could be attached.
"Our clients are still scratching their heads, saying, 'Do we want to do this or not? And a lot that had said they would are now saying they don't feel comfortable [that] the rules aren't going to change on us," said Bob Clarke, a former comptroller of the currency and a senior partner at Bracewell & Giuliani LLP.
Mr. Paulson has said the program's purpose is to encourage lending, but he also suggested using it to promote acquisitions and mergers.
The regulatory guidance expected today would apply to all banks and thrifts — not just the ones receiving capital from the Treasury — but it appears designed to gently prod bankers to use the money to jump-start lending.
Still, it is unlikely to satisfy critics on Capitol Hill. At a hearing last month, Sen. Charles Schumer, D-N.Y., said at the very least the Treasury should issue guidelines suggesting that banks earmark a portion of the capital for loans. He also said the guidelines should prohibit the capital from being used to let banks fund investments in risky or exotic products.
Industry representatives had feared regulators would take Sen. Schumer's advice and issue guidelines creating requirements for use of the fresh funding. Though the Federal Deposit Insurance Corp. favored that approach, according to sources, observers said it was difficult to do.
"You're at the intersection of policy and safety and soundness," said John Murphy, a lawyer at Cleary, Gottlieb, Steen & Hamilton and a former FDIC general counsel. "As a policy, it would be good for the country and, in many cases, the individual banks to put more good loans on the books, but as a bank supervision [issue] and as a matter of safety and soundness, bank regulators have always been very careful about not prescribing conduct because each lending decision is an individual one."
Mr. Clarke likened the current situation to the saving and loan crisis, when lawmakers put pressure on regulators to force banks to lend. "That is a very difficult message to get across because if you are an examiner you do not want to get called up on the carpet and be accused of being too easy on a bank," he said.