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Regulators: Strict bank rules don’t hurt lending

/ Source: The Associated Press

U.S. regulators fended off complaints Friday from lawmakers and small business owners that overly strict rules for banks have prevented crucial credit from flowing to where it is needed most.

U.S. bank lending last year posted the steepest drop since World War II, with the volume of loans falling by $587.3 billion, or 7.5 percent, from 2008. And some lawmakers are laying the blame on the policies of federal regulators.

Criticism echoed through a House hearing that while big Wall Street banks got multibillion-dollar bailouts, community banks that played no role in stoking the financial crisis have been subjected to overly strict directives that are squeezing credit for local businesses.

Martin Gruenberg, the No. 2 official of the Federal Deposit Insurance Corp., disputed accusations that the agency has discouraged banks from extending loans to small business and for commercial real estate.

The FDIC gives banks "considerable flexibility" in decisions to extend loans, Gruenberg said. "We do not instruct banks to curtail prudently managed lending activities."

Federal Reserve Gov. Elizabeth Duke said the central bank and other financial regulators have called on banks to meet the needs of creditworthy borrowers.

A House committee chairman, meanwhile, urged the Obama administration to find a more direct route for federal bailout money to get to small businesses, essentially circumventing banks.

Rep. Barney Frank, D-Mass., head of the House Financial Services Committee urged the administration to work with Rep. Nydia Velazquez, D-N.Y., who heads the Small Business Committee on legislation that would make that happen.

Congress must approve the new small-business fund proposed by President Barack Obama, which would be open to banks with $10 billion or less in assets.

Frank urged the administration to work with Rep. Nydia Velazquez, D-N.Y., who heads the Small Business Committee.

Velazquez wants the $30 billion from the bailout program sent directly to the federal Small Business Administration. It would then decide which businesses should get loans.

Velazquez said a more balanced approach is needed to get credit where it is needed.

"That does not mean doing more for financial institutions and expecting the benefits to trickle through to small firms," Velazquez said. "Taking $30 billion and simply handing it to banks — in the hopes that they will make loans — is not sound policy."

Also testifying Florida entrepreneur Steve Gordon, who said he wants to create 500 jobs at his company Instant-Off Inc., but can't get a loan from skittish banks.

"The bailed-out banks are not helping the situation," said Gordon. "If we depend on banks to make business loan decisions, we are in for a long, painful recession."

Some lawmakers appeared resistant to the idea.

Rep. Spencer Bachus of Alabama, the Financial Services panel's senior Republican, questioned injecting billions more into a federal agency.

What is keeping banks from lending to businesses, he said, are the strictures that federal bank regulators are imposing on them.

Wes Smith, president of E&E Manufacturing in Plymouth, Mich., said banks can't make loans "because the regulators have their foot on their necks. They cannot function."

Small businesses are seen as a linchpin for the recovery, with the potential to expand and soak up some of the high unemployment that has ravaged the country and preoccupied Congress.

At the same time losses are mounting on loans for commercial real estate, such as stores and office complexes, as buildings sit vacant and builders default. A cascade of hundreds of billions in losses on the loans could deepen the hurt for regional banks and quicken the pace of bank failures — which reached 140 last year.

At the gates stand the banks. In many cases their thinning capital reserves are one of the key factors limiting credit and clogging the pump of economic growth, Obama administration officials maintain.

Yet many in the banking industry say lending isn't hampered by a lack of capital, with even well-capitalized banks having trouble finding creditworthy borrowers. And small businesses may be reluctant to borrow in the toughest economic climate since the Great Depression.