Are Banks Overburdened by Regulatory Agencies?

Article excerpt

LOS ANGELES _ Federal bank examiners had been poring over loan records for months at the offices of Wells Fargo & Co. in San Francisco, trying to determine how weak the bank's real estate portfolio might be.

Based on that examination, Wells Fargo said last week that it will set aside $700 million to cover potential bad loans in the fourth quarter and write off $200 million as uncollectible.

It could have been far worse. The Wall Street Journal reported that some short sellers of Wells Fargo stock _ those betting that the shares will go down _ had expected the examination to be so devastating that regulators would end up seizing the bank. That didn't happen and there is no indication it will.

But even a $700 million set-aside points up the controversial role examiners are playing these days in their dealings with major banks, especially those in California.

Analysts are split on whether the state's other big banks _ San Francisco-based BankAmerica Corp., Los Angeles-based Security Pacific Corp.

and Los Angeles-based First Interstate Bancorp _ are likely to set aside large reserves in the fourth quarter.

What is clear is that regulators have targeted California institutions for increased scrutiny over the past 18 months.

A combination of worsening loans and extreme regulatory caution has meant a 110 percent jump in money set aside to cover bad loans at California's four biggest banks in the first nine months of this year, compared with the like period last year.

So far this year, the top four have added $3.73 billion to provisions vs. the $1.78 billion added last year. That doesn't include Wells Fargo's announcement of an additional $700 million to be added in the current quarter.

Most bankers don't argue that regulators are a vital part of the industry. But many complain that there has been an overreaction based on the savings-and-loan fiascos of the 1980s and that federal requirements are preventing more lending from taking place.

"There needs to be a clear awareness that the posture regulatory agencies take toward bank operations has a direct and immediate affect on credit availability," said American Bankers Association chief economist Robert Duggert.

If regulators decide a bank's loans might not be repaid or are falling too far behind, they may force the bank to set aside funds to cover the potential loss. A bank may not agree its portfolio is in such bad shape, but it typically must make the provision. …