After several weeks of flirting with controversial proposals to ease banking regulations and encourage financial institutions to loan money to sound borrowers, the major federal regulatory agencies late last week issued a large package of actual and proposed changes.
I find it impossible to separate the political, economic and regulatory motives for these rules, and I suspect even some regulators would share that difficulty. The rules are ostensibly aimed at restoring confidence in the banking industry, and perhaps they will.
But the emphasis in these confidence proposals seems to be squarely weighted on that first syllable -- the "con."
The proposals will generally make it easier for banking institutions to make more loans, including to favored customers who may already have heavy concentrations of loans with the bank. The rules also stress that banks should and can be more understanding to borrowers facing temporary business problems.
Real estate values will generally be increased to discount currently depressed market prices and reflect longer-term values of the projects being financed. It would also be easier for banks to include revenues from troubled loans as income.
More details of these provisions will emerge in the coming weeks, and they may well be changed in response to comments and reactions. Backers of the measures go to great pains to stress that these are not, in accountants' parlance, any kin to the kind of regulatory forebearance that allowed the savings and loan industry to self-destruct.
However, a reading of last week's summary announcement yields an uncomfortable conclusion that it is primarily a political document that has emerged from the collective efforts of the Comptroller of the Currency, Federal Deposit Insurance Corporation, Federal Reserve Board and the Office of Thrift Supervision.
Their joint statement, for example, suggests that public confidence might be improved by providing "enhanced disclosure" to the public of the details of certain problem loans. But after lauding the virtues of such disclosure, the agencies then go on to say that such provisions are only voluntary.
Further, the main audience for these proposals is not the public, the general business community or even the bankers. The primary audience that's expected to get the new regulatory message, loud and clear, is the pool of banking regulators around the country.
Here's how Treasury Secretary Nicholas F. Brady responded to the proposals:
"We hope that the actions taken today will encourage lenders to make prudent loans and assure that examiners perform their reviews in a balanced, sensible way," he said in a statement.
"I commend and stress the importance of the regulators' commitment to promptly communicate these policies to the nearly 7,000 bank examiners in the field. Confidence and understanding between banks and their regulatory examiners are essential to sound lending practices and to prudent, evenhanded, common-sense implementation of supervisory practices."
Secretary Brady's statement consisted of only five sentences, so his exhortations to get the word out to the banking examiners is hardly being taken out of context. Similar messages are contained in the agencies' joint statement (see related excerpts).
Despite a nearly ruined savings and loan industry, and a bankinindustry facing its most serious challenge since the Great Depression, there are mounting pressures to open up the banking industry's lending windows -- right away.
The current euphoria over the gulf war victory could be short-lived if the recession lingers too long or shows signs of becoming even more serious. And the Bush administration's economic brain trusters do not want to be tagged with any charges that the slowdown was made worse by heavy-handed bank examiners who prohibited banks from making good loans that helped revive the economy.
Such charges have, in fact, been taking shape as the result of a wealth of horror stories from bankers and perhaps their most stressed group of borrowers -- the commercial real estate industry.
Ironically, it was the desire of top banking officials to restore confidence in the Federal Deposit Insurance Corp. that first unleashed a corps of newly aggressive bank regulators.
These regulators generally did what their superiors in Washington asked of them. They toughened over sight of lending, devalued the bloated carrying values of bank real-estate portfolios and forced banks to make painfully large additions to their loan-loss reserves.
All of this, we have been told, was designed to reduce future payouts from the FDIC, help the banks return to a sounder footing and restore public confidence in the banking system.
Now, we are being told, in effect, that these public-spirited regulators may have given the banks too much of a good thing.