WASHINGTON_ Overzealous bank regulators and an attempt by Congress to punish greedy bank executives are combining to restrict the ability of the nation's 8,000 community banks to lend to small businesses, Treasury Secretary Timothy Geithner said Tuesday.
Called to testify before the Senate Finance Committee about the Obama administration's fiscal 2011 budget proposal, Geithner instead spent much of his time discussing why lending hasn't picked up at community banks, often the only lender to small-town America.
"Where is the urgency, Mr. Secretary, in solving this," Sen. Maria Cantwell, D-Wash., demanded of Geithner. "People put the screws to the community banks and gave all the money to the big banks. I'm telling you they are coming into my office every day with these stories, so I would urge you . . . to act now and not wait for legislation."
Sen. Bill Nelson, D-Fla., said he's hearing "cries of anguish" from small businessmen who can't get loans and must close their doors. Kentucky Republican Sen. Jim Bunning turned red-faced as he angrily described how small banks in his state are being hamstrung.
"It's the (federal) regulators that have stopped the flow of money out of the community banks to the small business person, for fear of the (federal) regulators coming in and consuming the bank," thundered Bunning. "They're stopping all lending to the people who absolutely need the lending."
Geithner acknowledged that federal bank regulators who fell down on the job before the crisis now want to appear tough.
"They are now overcorrecting and they're making it hard for them (community banks) to make new loans," said Geithner, adding that he's hearing complaints too. "They say the same things to me."
Correcting the problem, he cautioned, is difficult because bank regulators are independent agencies that don't take orders from the Treasury Department.
Bank regulators also have demanded that lenders set aside higher capital reserves to cover potential losses. Insufficient capital on hand to cover outstanding loans was an important contributing factor to the financial crisis. The higher capital-to-loan ratio was needed, but carries consequences.
"What they (small banks) did was basically they started canceling loans to individual businesses. That's how they got the capital ratios to come back," complained Cantwell.
Chris Cole, the senior regulatory counsel for the Independent Community Bankers of America, which boasts nearly 5,000 member banks, said there are many disincentives to lend because of tougher regulation.
"It's the fact that the regulators are coming in with sort of unofficial capital requirements that are higher than the minimums now required, making banks raise more capital. They're coming in with arbitrary thresholds with respect to loan loss reserves," he said.
Geithner politely suggested that congressional posturing has played a role, too. Many community banks — technically, lenders with assets below $10 billion — qualified for federal bank bailout funds. Geithner aide Gene Sperling, however, said that 600 community banks withdrew their applications after they saw Congress change the rules.
Lawmakers, angry that many big banks had given or would give large bonuses, demanded changes in the Troubled Asset Relief Program that included tough compensation restrictions as a new condition for receiving bailout funds. Many small banks balked.
As Congress considers legislation to revamp financial regulation, lawmakers and the administration are considering tough new rules and fees that are making banks of all sizes nervous.
"They've worried that the full bulk of conditions and future conditions will make them vulnerable if they come" and seek assistance, Geithner said.
On a trip to Nashua, N.H., Tuesday, President Barack Obama unveiled a new effort to use $30 billion in TARP money that's been returned by large banks to create a Small Business Lending Fund that would make this money available to community banks.
"The more loans these smaller banks provide to creditworthy small businesses, the better deal we'll give them on capital from this fund that we've set up," Obama said. "All of this will help small banks do even more of what our economy needs."
The loan program, which Congress must approve, would redistribute the funds outside the TARP program to avoid the stigma of a bailout and to skirt tough restrictions aimed mainly at larger banks.
On a conference call late Tuesday, Geithner explained that the government would inject capital into qualifying community banks. These banks pay dividends to the Treasury Department just as large banks did, but these dividends will be lowered if a community bank increases lending to small business above 2009 levels.
"The objective is to try to make sure that the economics of the program improve as you lend more. We're trying to create strong incentives for banks to lend in support of small businesses," Geithner said.
Unstated in Washington and in Nashua, however, was the sober reality that many community banks are exposed to huge losses for commercial real estate loans now souring at a record pace. Smaller banks made up the brunt of the 140 bank failures last year and the nine reported so far in 2010.
Lending requires borrowers, too. The most recent Federal Reserve survey of bank loan officers, covering January, found that the number of consumers and businesses seeking loans continues to fall.
In the most recent survey of consumer credit, dating to November, the Fed said lending to consumers, many of them sole proprietors, had shrunk at an annual rate of 8.5 percent.
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