WASHINGTON - Regulators told a House subcommittee Tuesday that provisions in last year's banking law have discouraged banks from making loans.

They urged Congress to amend the legislation in order to spur lending and help bolster the economy.

"There are a number of provisions of the act that would appear to work in the direction of reinforcing tendencies to restrict credit availability," said Richard Spillenkothen, the Federal Reserve System's director of bank supervision and regulation. He was testifying to the House Banking subcommittee on oversight and investigations.

Restrictive Standards Cited

Mr. Spillenkothen cited three provisions of the Federal Deposit Insurance Corporation Improvement Act that might have restrained lending: new standards for real estate lending, tougher standards for the operation and management of banks, and stricter capital requirements.

Dortild Coonley, chief national bank examiner for the Office of the Comptroller of the Currency, echoed his colicague's remarks, telling lawmakers: "It wouldn't bother me a bit if you repealed the entire law."

Rep. Carroll Hubbard, D-Ky., chairman of the subcommittee, agreed that recent legislation has taken a toll on the economy.

"The tightening of regulatory capital standards over the last

few years has driven many lenders away from commercial lending and toward the government securities market," he said.

"In fact, for the first time in over 20 years, our nation's banks now hold more government securities than they do commercial loans.

"And while that might mean a lower level of risk for the banks, it also means that hundreds of millions of dollars are being siphoned out of the U.S. economy - money which, as you know, we desperately need for the creation of new jobs."

Symptom of |Overload'

Rep. Bill McCollum, R-Fla., said bank holdings of government debt "are not a good long-term sign for the banking sector or the economy. The shift in assets may be a symptom of regulatory overload."

The Federal Reserve Board reported in late July that bank holdings of government securities had reached $607.3 billion, slightly more than the $598.5 billion in commercial and industrial loans held by banks.

It was the first time in 27 years that banks were more heavily invested in government securities than business loans.

John Downey, deputy director for regional operations at the Office of Thrift Supervision, told the panel that savings institutions' lending capacity was crimped by the 1989 thrift bail-out law.

Limits on loans to one borrower and separate capital requirements for real estate development subsidiaries have dampened acquisition, development, and construction lending, even though some of those loans may pose only moderate risks, he said.

"We have concluded that residential construction lending poses far less risk than either acquisition or development lending," he said. "It is a line of business that may offer a good potential for profit while involving an acceptable level of risk, and is closely allied to traditional thrift business."

Focus on Securities

The regulators themselves were cited as a reason for they lending pullback. Ralph Hadley, a Florida lawyer and bank director, said bankers would not state their true feelings about the Comptroller's bank examiners unless allowed to testify with bags over their head.

Tommy Thompson, vice president of the National Association of Home Builders, accused regulators of "terrorism" and "oppression."

Mr. Coonley of the Comptroller's office said it "boggles my mind" to hear such comments and insisted that abitrary conduct by bank examiners is not tolerated. At the same time, he stressed there are real problems in bank loan portfolios that can't be ignored by examiners.

Bank executives said the shift toward government securities results from the industry's turn toward less-risky investments.

"What you find is that banks do opt for the easy investment." said Alan M. Gavie, chief economist for Crestar Bank. Richmond, Va. "In this phase of the business cycle, banks always buy securities.

Quoting from a recent American Bankers Association survey, Mr. Gavie said U.S. banks spend about $10.7 billion on compliance each year, or 12% of the industry's operating costs. Bank chief executive officers spend an average of one full day a week on compliance issues, the study found.

|Serious Long-Term Problem'

"The cost of unnecessary paperwork and red tape will not go away when the economy improves," Mr. Gayle said. "This is a serious long-term problem that will continue to eat away at the competitiveness of the industry and erode its ability to support the economic growth of towns and cities across the country."

Banking, historically seen as an art, is being turned into a numbers game by regulation, said Robert W. Hawkins, president of the independent Bankers Association of America, who has complained repeatedly, about the level of regulation and the "micromanagement" it requires. "The day we try to make it a science, all of us are no longer necessary," he said.

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