Banking Law

President Obama has been jawboning the nations largest banks about doing more of that good old small business lending that will pull our economy up by its bootstraps and right out of the deep funk in which it currently wallows. All you have to do is lend, and we shall be saved, is his line, and he's sticking to it. A couple of the big bank executives who weren't "snowed in" and actually made it to last week's meeting at the White House told the president that they'd start taking a harder look at loan applications to make certain that they weren't throwing any wheat away with the chaff. Nobody really believes big bankers when they say things like that, and the president had berated them all as a pack of "fat cats" in a recent "Sixty Minutes" interview, so the entire back-and-forth seemed like so much political theater, designed for public consumption and accomplishing little of practical value.

Today, the president met with representatives of community bankers and his tone was much more conciliatory.

Meeting with 12 executives representing small banks, President Barack Obama vowed Tuesday to press federal agencies to "cut some of the regulatory red tape" that may be limiting the ability of community bankers to lend more as the economy recovers.

"Some small bankers still have some regulatory constraints," Obama explained in remarks made in conjunction with the meeting. "In some ways, the pendulum may have swung too much in the direction of not lending after decades of too much of a focus on getting money out the door."

Alain Sherter of BNet did a good job last week of laying out the case for the importance of community banks and the small businesses they serve. No lap dog of the corporate elite, Sherter called on the White House "to do something" for the little guys after bailing out so many of the "fat cats." On the surface, at least, the White House appears to be concerned about "doing something"

At least the bankers were able to press home to the president (and have reported in the business press) what many of us have been seeing on a daily basis for many moons.

Small bankers discussed concerns that bank examiners are pressuring them to hike their capital, effectively restricting their ability to lend more at the same time that small businesses are cutting back on their borrowing, said Chris Cole, regulatory counsel at the Independent Community Bankers of America.

Cole points out two basic problems with a proposed remedy of "make more loans." First, it's difficult to lend more when you're required by examiners to write down the value of assets (especially commercial real estate loans), increase loss reserves, and increase capital. That's exactly what bank examiners have been doing, which, regardless of your view as to whether that's prudent regulation or counter-cyclical craziness, means that banks who suffer from such regulatory tough loved simply don't have the money to increase lending to small businesses. Second, small businesses are cutting back on their borrowing because their businesses are suffering. Examiners are also "encouraging" bankers to toughen underwriting standards and to dump bad borrowers, neither of which courses of action is a game plan for increasing lending to small businesses.

Many observers are skeptical that meetings like the one today with "The One" will actually change anything. As ABC reported this afternoon, the president claims that his office doesn't necessarily get the respect it thinks it deserves when dealing with the federal banking agencies.

?[W]e don?t have direct influence over our independent regulators.?

Perhaps not "direct influence" (although that is debatable), but certainly while those agencies publicly (and privately) bridle at political pressure, at the same time they factor it into most of the critical decisions they make. If the president is serious about cutting red tape, he can accomplish something. However, don't bet on it. A safer bet is that community banks will continue to suffer under the regulatory lash and lending to small businesses will continue to flounder.