The chief regulator of New Jersey's banks is asking Congress to review the effects of bank regulation on small businesses.

Jeff Connor, the state's banking commissioner, heads a "credit crunch task force" that was formed in March. At a recent public hearing, the group listened to testimony from small-business owners who were having trouble getting loans.

"The credit crunch is mostly attributable to the economy and overbuilding in the '80s," Mr. Connor said. "But overregulation is also a cause."

After the hearing, the eight-person New Jersey task force, which includes bankers and public officials, said it will ask Congress to focus on the effect of the Federal Deposit Insurance Corporation Improvement Act of 1991 on banks' ability to lend.

At the end of 1989, New Jersey banks had $107.8 billion in loans outstanding, according to the state's department of banking. That total had dwindled to $81.4 billion by the end of 1992.

Small-business owners at the hearing - all of whom claimed to run profitable ventures - recounted tales of rejection from their bankers.

Bill Graham, the owner of a printing company in Burlington, N.J., said bankers had continually quashed his hopes. In 1990, amid a crumbling economy, his bank forced his company into bankruptcy, he said. He did not name the bank.

His firm recently emerged from bankruptcy with the help of a guaranteed loan from the state. But tgdAy, Mr. Graham said, he cannot find a bank to give him the working capital he needs to run the business.

He testified that his original bank is "being totally uncooperative, up to the point of hostility."

His tale provoked a discussion common in banking circles these days: Is credit tight because of overregulation or because bankers are correctly making conservative loan decisions?

Constrained by '91 Law

Bankers on the task force said the new banking law offered them no choice with cases like Mr. Graham's. They said that under the FDIC improvement Act they must classify a loan to a company just emerging from bankruptcy as "substandard" and reserve heavily against it. The result: no loan.

"Basically, banks are taking a very cautious approach due to the regulatory environment, and to some degree that is hurting small businesses," Mr. Connor said.

But Bruce Dansbury, a vice president in charge of small-business banking at CoreStates New Jersey National Bank, said bankers are eager to lend. Several small businesses have recently borrowed from his bank, he said, including a start-up retail shop in downtown Trenton.

"It's a little difficult as a banker to discuss a credit crunch when we're out there every day trying to bring in new business," Mr. Dansbury said. "Whether or not you believe there is credit available depends on your personal experience."

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