WASHINGTON — Federal banking regulators on Friday plan to fight back against the idea that overzealous examiners are hindering small business and commercial real estate lending.
"Deciding which borrowers or businesses a bank should lend money to is not part of our examination process," Comptroller of the Currency John Dugan plans to tell the House Financial Services Committee, according to prepared testimony released ahead of a hearing.
The committee on Friday is scheduled to examine conditions for small business and commercial real estate lending in local markets. Dugan, Federal Reserve Governor Elizabeth Duke and Office of Thrift Supervision Acting Director John Bowman plan to tell lawmakers that they are encouraging financial institutions to lend to creditworthy borrowers, but to do so prudently.
"While we should be very careful not to encourage the banks we supervise to become excessively conservative, we simply cannot turn a blind eye to increasing losses and mounting credit problems," Dugan plans to say.
Bowman will tell lawmakers the Office of Thrift Supervision is encouraging institutions "to make all types of loans allowed by statute, provided they are prudently underwritten to creditworthy borrowers."
Given the recent problems banks have experienced as a result of lax lending standards, "some tightening in credit is expected and needed," Bowman will say.
Financial institutions have "learned a hard lesson about the merits of returning to the basics of sound loan underwriting," he plans to note.
Lending by banks last year posted its sharpest decline since 1942. The industry has suggested overzealous bank examiners are contributing to a pullback in lending. A drop in demand and a dearth of creditworthy borrowers factor into the decline as well, banks maintain.
"We do not turn down loan applications because we do not want to lend," William B. Grant, chairman and chief executive of First United Bank & Trust, plans to say on behalf of the American Bankers Association. "In some cases, however, it makes no sense for the borrower to take on more debt. Sometimes, the best answer is to tell the customer no."
Recent guidance from banking regulators said agencies would not hinder the provision of credit to creditworthy borrowers.
Regulators, however, realize that the business environment for banks still is challenging.
Duke will remind lawmakers that the number of at-risk banks stands at 702. That figure is at a 16-year high.
"Many firms are capital-constrained and may be unable to increase lending," Duke will say.