Bankers Feel Laws Hurt Loan Making, Competitiveness

Article excerpt

At first glance, those outside the banking industry in Oklahoma may find it hard to find sympathy for bankers who complain that excessive federal regulation has put a stranglehold on their ability to function in the marketplace.

After all, most Oklahoma banks reported strong, even record, profits during 1992.

But those on the outside looking in also complain that banks are not making the kind of loans they once did. On that one point, both sides agree.

Bankers say they are still in the business of making loans, but loan demand among qualified borrowers is soft. Individuals and companies both are concerned with paying off debts, not incurring more. Historically low interest rates also give banks very little incentive to book new loans that don't meet high standards. This has led to an unusually high percentage of bank assets that have been placed in no-risk government securities rather than in loans.

Small business owners, by contrast, have said their demand for loans has not lessened. They want and need loans, but bankers won't make them. They say the only ones who can get loans are those who can document that they don't need them in the first place.

Character lending is what many small business owners seek. This is the traditional type of lending in which bankers extend credit based on the judgment of the individual as well as other risk assessment factors.

However, banks often are prohibited from operating with that human touch. Regulators require many loans to be backed by a secondary source of repayment and at least three years of demonstrated business experience. Those requirements can be deadly for the entrepreneur or the successful new business owner who needs to expand to meet the demands of his growing customer base.

The restoration of character lending is one thing Oklahoma bankers are calling for as they participate in the industry's national "Cut the Red Tape Week."

They also seek to be more competitive with other types of financial institutions which are not required to comply with so many regulations.

Enactment of the laws creating many of the rules governing banking is rooted in part in what happened in Oklahoma between 1982 and 1992 when the bottom fell out of the economy. Banks, like everyone else, crashed and burned right and left. What had been inconceivable in the heady days of the boom _ a bad real estate loan, oil prices plunging _ soon became hard, cold reality.

The severe economic problems brought to light the excesses of the likes of Penn Square Bank and numerous savings and loans until outraged politicians created laws to make sure those abuses never happened again.

Out of that environment came such laws as the Financial Institutions Reform, Recovery Enforcement Act of 1989, known to bankers as FIRREA and to the public as the "savings and loan bailout bill" and then the Federal Deposit Insurance Corp. Improvement Act of 1991, for which regulations are still being written.

These laws and many before them have mandated to a large extent what banks can do and how they can do it. They tell banks when they have to have appraisals, when they have to get new appraisals, who can do the appraisals, which bank policies must be formalized in writing, how much money and under what circumstances they can lend to a business owner who sits on the board, when to report cash transactions to the Internal Revenue Service and what information to include, how to track loans that have been funded, how to disclose credit terms and even where the FDIC logo must be displayed.

Some of the laws go to the heart of the safety and soundness of the individual banks, the banking system and the government backing that their deposits have. Others are sidelights to those fundamental issues.

A study conducted for the Independent Bankers Association of America by the Grant Thornton accounting firm categorized 13 federal regulatory areas which the nation's 9,682 locally owned and operated institutions found most onerous. …