From the Wall Street Journal:
Regulators’ Conundrum:
How Much to Encourage Lending
By DAMIAN PALETTA
January 23, 2008; Page A23
The global credit crunch has created a quandary for federal regulators: They want bankers to lend money, but they also want to forestall a return of the weak underwriting standards that fueled the current mess.
Yesterday, the Federal Reserve’s Federal Open Market Committee slashed the federal-funds rate by three-quarters percentage point, a move aimed at encouraging lending by making it cheaper for consumers and businesses to borrow money. But the Fed, the Office of Thrift Supervision and other regulators have spent much of the past 18 months pushing bankers to lend more cautiously, a goal that is expected to remain in place.
“We are probably making bankers schizophrenic,” said OTS Director John Reich.
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Federal regulators are facing criticism from politicians and others for allowing lending standards to weaken during the recent housing boom. Lending across a broad range of industries boomed, driven by competition and an increased appetite for risk. “It was like a feeding frenzy was developing,” former Fed governor Susan Bies said in an interview.In 2006, regulators started exploring ways to rein in lending, specifically targeting commercial-real-estate and residential mortgages. Recent proposals have pushed lenders away from offering loans to borrowers with spotty credit histories, for example.
It is unlikely regulators will roll back new regulatory policies in order to encourage more liquidity. That could force the Fed and other regulators to become increasingly creative in their messages to banks.
“You are going to see banks being very, very conservative,” said C.R. “Rusty” Cloutier, president and chief executive of MidSouth Bancorp Inc. in Lafayette, La. “I think regulators are going to be erring on the side of making sure that our banks don’t get into trouble. They are going to be looking at banks with a fine-toothed comb.”