Banks blame government for lack of lending (02-03-2009)

Capital requirements, intrusive regulators slow flow of credit, they claim

updated 8:43 p.m. ET, Mon., Feb. 2, 2009 NEW YORK - Banks that are being scolded by the government for not lending are blaming a new obstacle: The government itself. Fearing more bank failures, federal regulators are forcing institutions to hold more money in reserve and scrutinizing loans. But bank executives complain that the extra oversight thwarts their ability to quickly pump billions of bailout dollars into the ailing economy. Banks say they are caught in a frustrating Catch-22: How can they make more loans when creditworthy borrowers are scarce, their balance sheets are saddled with bad debt and regulators are hounding them to horde cash?

Regulators say they are only being careful, and they deny slowing lending.

The government rolled out the $700 billion bailout late last year, hoping that injecting money into banks would expand lending and ease the credit crisis. But in a survey released Monday, the Federal Reserve said many banks are making it harder to get credit cards, mortgages and other loans. Regulators have long required banks to keep a minimum level of capital on their books to stay in business. It was typically a figure equal to 10 percent of assets. But as the financial crisis has worsened, many banks say they have been told to keep capital equal to at least 12 percent of assets. At the same time, regulators are combing through banks’ loan applications and flagging those considered too risky. It’s unclear how broadly the stricter rules are being applied. But interviews with bank executives indicate that both healthy and troubled banks are facing more stringent oversight, regardless of whether they have received bailout money.

 

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