WASHINGTON - A House subcommittee is concerned that bank examiners are doing to California what they [ILLEGIBLE WORDS] England - reducing [ILLEGIBLE WORDS] ability by imposing higher [ILLEGIBLE WORD] necessary capital standards.

In a letter to the three bank regulators, Rep. John M. Spratt, D-S.C., and Rep. Christopher Cox, R-Calif., are asking for data on the number of California institutions under orders to increase capital above levels required by law.

"We have concerns about the broad imposition, during a time of economic downturn, of capital requirements above the regulatory minimums through supervisory orders," the two said in the letter addressed to Comptroller of the Currency Eugene A. Ludwig.

Suspecting a Parallel

Such requirements "may have aggravated the credit shrinkage in" New England, the two wrote. "We are now interested in whether there might have been any similar bank supervisory pattern in California."

The two lawmakers are the chairman and ranking Republican, respectively, of the House Government Operations sub-committee on commerce, consumer, and monetary affairs.

The panel this week issued a report concluding that New England was the only region significantly affected by a credit contraction that had its roots in a lack of supply, rather than weak demand.

For much of the rest of the country, the report said, weak credit demand by business was responsible for the contraction.

Part of the cause, the report concluded, was tough new capital standards mandated in the 1991 Federal Deposit Insurance Corporation Improvement Act.

In particular, risk-based capital, which requires more capital for commercial loans than other types of credits, removed incentives to lend to small business.

But the problem was made worse by the decisions of examiners to raise capital requirements at individual institutions to levels well above the regulatory minimums.

Those decisions had the effect of "enforcing a shrinkage of bank assets and loans by a greater degree than would be necessary merely to meet the minimums."

Economic Awareness Urged

The panel urged the agencies to avoid raising capital requirements for individual banks when "the collective effect of its application to several banks in a region will be detrimental to the economy of that region."

The panel also found that the annual examinations required under the 1991 law are "burdensome and costly," and it urged Congress to rewrite the law to give regulators more flexibility in setting examination schedules,

Another provision of the 1991 law setting stiff civil money penalties for any violation of law or regulation "has established an atmosphere of almost total risk avoidance," even if inadvertently, the report concluded.

As a result, the panel recommended that the law be rewritten to require "some level of intent or negligence" before the stiffest penalties could be imposed.

Lack of Demand Noted

In its analysis, the report argued that the term "credit crunch" is "misleading and overdramatic." Outside New England, it said, much of the contraction was due to a lack of demand by business borrowers.

For example, the National Federation of Independent Business has surveyed 2,000 of its members annually for 19 years. Since 1989, there has been only a slight increase in the number of small companies saying they have difficulty in obtaining credit, the report noted.

Moreover, Fed surveys show that the decline in bank credit was not offset by increases in credit extensions from other types of institutions - an indication that the contraction in loans was caused by weak credit demand rather than a lack of supply.

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