President's Rx For Bank Loans Only an Aspirin
The Bush administration desperately wants banks to stoke the recovery with loans, but the litany of changes it announced Tuesday will not set the economy on fire.
The widespread view is that the recovery is likely to drag along while overextended borrowers pay down their debts, chastened bankers work through their problems, and bruised examiners regain their confidence.
To be sure, the changes are welcomed by banks and represent an important symbolic action.
But reducing capital requirements for some loans, counting more preferred stock as equity, and promising more uniform examination standards will help only at the margin. They alone will not spur significant new lending.
"These are interesting ideas, but at the end of the day I don't think that helps get any more money out on the streets," said John Douglas, a former FDIC general counsel who is now a partner with Alston & Bird, a law firm in Atlanta.
Not Enough Clout
In the grand scheme of economic woes, the changes are too small to get credit flowing, said Steven A. Wechsler, president of the National Realty Committee, which represents developers and bankers. "Today's problems are acute," he said.
"It's tinkering around the edges," agreed Gilbert T. Schwartz, a partner with Skadden Arps Slate Meagher & Flom. "They are taking a cosmetic approach toward solving a problem that needs a more fundamental answer."
This week's credit-crunch remedies echo include many already proposed by the administration, such as an order to examiners to consider a borrower's ability to repay a loan when valuing a property and an exhortation to bank regulators to convince their examiners to follow the new rules.
New Details on Capital
One of Mr. Bush's most specific cures for the credit crunch would permit bank holding companies to meet a larger chunk of the 4% core capital requirement with preferred stock. Preferred is easier to raise than common stock and a holding company can use it to buy common stock in a subsidiary bank, thus bolstering core capital.
Deputy Treasury Secretary John Robson said Tuesday that further capital revisions may be forthcoming.
"How residential housing might be addressed in the standards is something we thought ought to get looked at," Mr. Robson said. He confirmed that the Treasury is weighing a proposal to halve the capital requirement for certain residential construction and apartment loans.
SEC Bars Splitting
The plan with the most promise would have allowed bankers to write off the bad portion of a troubled loan and return the balance to performing status. But this so-called loan-splitting was shot down over the summer by accountants and the Securities and Exchange Commission.
Two of the administration's changes have helped. Bankers got the green light this summer to roll over short-term construction loans, so these "miniperm" loans are being extended. And bankers got detailed instructions from the Comptroller of the Currency on ways to restructure troubled credits.
But overall, the administration's drive to spawn bank lending, which began in earnest in March, has been off-course.
Not the Whole Picture
By focusing on lack of lending by banks, commercial and investment banking sources said the Bush administration was overlooking the biggest obstacles to a recovery.
First, borrowers are unable or unwilling to take on more debt.
"What's missing here is high-quality borrower demand, not a bank unwillingness to lend," said John Oros, a Goldman Sachs & Co. limited partner.
"Loan demand is way off," confirmed Jeffrey R. Springer, president of Citizens Bank of Maryland. "Commercial businesses have contracted the amount of credit they use. So have consumers."
The Look of a Crunch
Susan Krause, senior deputy comptroller for bank supervision policy at the Office of the Comptroller of the Currency, said banks have raised underwriting standards and fewer borrowers can make the grade.
"It looks like a credit crunch to those people that don't want to meet those standards," she said.
Banks, too, are digging in, trying to improve asset quality.
The industry gorged on real estate lending during the 1980s, said Mr. Douglas, the Alston & Bird lawyer. "Banks don't have much appetite for things like construction loans."
A banker who requested anonymity said: "You don't lend into a problem and real estate is a problem now."
And examiners are unlikely to ease up while they are getting it from both sides: the administration blaming them for causing the credit crunch and Congress accusing them lax supervision that caused massive bank failures.
Just Like on Television
"They watch C-SPAN," Ms. Krause said, referring to the grilling Comptroller Robert L. Clarke got at the Senate Banking Committee during his recent renomination hearings.
Skadden Arps' Mr. Schwartz, who is a former regulator, said banks will not lend because of overly critical examiners.
"You're not going to make a loan if an examiner is going to criticize it," he said. "And examiners are not going to change their view of the world."
Mr. Schwartz said tough examinations are here to stay because to regulators, "the crackdown is just catch-up."