Wednesday, February 3, 2010

Geithner tries to explain to the Senate why banks aren't lending

McClatchy's Kevin Hall:

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 theTroubled 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.

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