Banks' Credit Crunch

NATIONAL bank regulators are considering being somewhat less tough on the banks. That's probably a good idea. We say ``probably'' because it is so difficult for outsiders to evaluate whether or not regulators, in examining the books of the banks, have become ``overzealous,'' as President Bush and members of his administration have charged.

Surveys show that banks have become more strict in making loans this year, and thereby have contributed to the economic slowdown. Bank loan officers are likely responding to a mix of concern about regulation requirements and the greater risks of business failure arising from the economic slump.

Whatever, the office of the comptroller of the currency, which regulates 4,200 nationally chartered banks, has been drafting rule changes to give banks more flexibility in the way they report problem loans. Banks would be encouraged to work more with borrowers to restructure real estate and other loans that are not being repaid on time.

Bank regulators got tougher after it became obvious that their colleagues examining the books of the savings and loan industry were too lax in many cases. The result was billions of dollars in extra losses.

An imaginary example might clarify the bank regulatory problem. Suppose a bank has made a loan to a real estate developer. Because of the slump, the developer is having trouble selling some condominium apartments and offers them at reduced prices. He or she can't make his loan payments on time. Does the regulator require the bank to set aside reserves against the entire loan? Or, assuming that the apartments are still worth something, should the bank set aside reserves for only a proportion of the loan? Estimates of the value of such loans are usually something of a judgment call. If regulators are tough and require large reserves, it may prompt banks to foreclose on such mortgages. If the regulator is too lax, a troubled bank could still go under and because its deposits are insured by the Federal Deposit Insurance Corporation, the failure might cost the taxpayers money.

The FDIC has already indicated it anticipates losses of $5 billion next year, bringing its reserves down to an inadequate $4 billion. FDIC Chairman William Seidman has proposed that banks pay a one-time assessment equal to 1 percent of their total deposits to bolster the fund. He also suggests regulators prevent weak banks from paying dividends on their stock to boost their capital position. Combined with regulatory moderation, both ideas sound appropriate.