Almost 20 years ago the United States endured a credit crunch that prolonged a recession and cost thousands of jobs.

In the late 70s and early 80s regulatory laxity and mistakes were major contributors to the thrift crisis and severe problems in commercial bank lending portfolios.

Then, as is now widely agreed, the pendulum swung too far. Regulators overreacted, toughening up their standards and causing banks to cut back on the credit they were extending.

Today we face the real prospect of history repeating itself; only the credit crunch could be worse this time. Whether we have the mother of all crunches will be determined by how a number of issues are handled by our government.

This crunch could be worse because important sources of credit are already on the sidelines. The securitization markets are weakened and, in certain sectors, not functioning at all. Some banks cannot be relied on to expand their lending portfolios, because they are constrained by their capital positions.

If we hope to return to meaningful economic growth, other institutions will have to fill these gaps. Thousands of banks that are not capital-constrained will have to expand lending. Fortunately, many are in a strong position to make more loans. They have the capital — 99% of the industry is well capitalized — and in many cases are growing. Deposits are increasing as customers seek the safety of insured deposits.

But these bankers are treading carefully. Many were around for the overreaction of the late 80s and are watching regulators and the Congress to see what they will do.

These are the issues that will affect the willingness of these bankers to lend.

First, who will be the bank regulators? The next president will nominate new ones. They should be people who will instill confidence in the markets and have the experience to address the complex financial situation we face.

Second, how will examiners respond? Their natural tendency, as we learned 20 years ago, is to become overly conservative. After all, they are seldom publicly criticized for telling banks to move loans to the nonperforming category.

Certainly, loans and investments should be valued correctly, and strong reserves are appropriate. But we need to strike the right balance. The current heads of the bank regulatory agencies are experienced and well aware of this need for balance, but there is already significant anecdotal evidence of examiners overreacting.

Third, how will the new Basel capital requirements be implemented? Strong capital is needed, but an overreaction will keep some banks from putting new loans on their books.

Fourth, how will Congress react to failures? Congressional oversight is appropriate, but, again, what is needed is balance. Will we see a series of hearings in which regulators are highly criticized? If so, examiners will protect themselves by cracking down.

Fifth, will we see new laws or regulations that inhibit lending through prohibitions, new regulatory costs, or exposure to litigation?

Bankers closely followed the recently enacted housing and GSE bill and the recently finalized Federal Reserve regulations on mortgage lending. Early proposals, aimed primarily at weakly regulated mortgage brokers, would have chilled mortgage lending by thousands of banks that never made a subprime loan. Fortunately, the new law and regulations appear to have been improved in this regard, but bankers remain concerned that Congress and the regulators will overreach as they try to respond to abuses, real or perceived.

Sixth, will Congress change the bankruptcy laws in a manner that makes lending more uncertain and costly? In making lending decisions, bankers consider not only the probability of default, but also how much may be recovered upon default and how difficult the recovery will be. Bankruptcy laws are a major factor in that calculation, particularly when lenders are considering borrowers who tend to be higher-risk, including small businesses and lower-income consumers.

Congressional proposals to repeal recently enacted provisions that cut back on bankruptcy abuses and to let judges rewrite mortgage contracts are already worrying bankers.

Seventh, will trends in accounting continue? Many observers believe accounting policies and practices have greatly exaggerated the financial market's problems by pouring gasoline on the fire rather than measuring its heat.

I recently talked to a community banker who was negotiating a construction loan on a new office for an expanding small business. This very well-capitalized bank has a strong lending portfolio, and its deposits increased 14% last quarter as people moved their funds from the stock market and other investments.

The borrowers are wealthy individuals who have established business records and will personally guarantee the loan and pledge the property as collateral. The local economy, though not robust, is expanding.

If this loan is not made, jobs will be lost. Yet the banker was asked by an examiner why he would even consider making another construction loan at this time.

This banker is planning to make that loan anyway, because he thinks it is a good loan and important to his community. But will this type of loan, and many thousands like it, be made next year? Bankers are watching and waiting to see what policymakers will do.

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